| GARDNER DENVER INC ITEM 1A RISK FACTORS The Company may not be able to effectively integrate acquired businesses and fully realize the related anticipated cost savings, synergies, or revenue enhancements |
| Including the purchase of the Todo Group, completed in January 2006, the Company has completed 20 acquisitions since becoming an independent company in 1994, with the three largest transactions occurring since January 2004 |
| The continued success of the Company depends in part on its ability to effectively integrate acquired businesses into its operations |
| The Company faces significant challenges in consolidating functions and integrating procedures, personnel, product lines, and operations in a timely and efficient manner |
| The integration process can be complex and time consuming, may be disruptive to the Company’s existing and acquired businesses, and may cause an interruption of, or a loss of momentum in, those businesses |
| Even if the Company can successfully complete the integration of acquired businesses into its operations, there is no assurance that anticipated cost savings, synergies, or revenue enhancements will be realized within 11 _________________________________________________________________ the expected time frame, or at all |
| The Company’s ability to realize anticipated cost savings, synergies, or revenue enhancements may be affected by a number of factors, including the following: • the Company’s ability to effectively eliminate redundant administrative overhead and rationalize manufacturing capacity is difficult to predict |
| Accordingly, the actual amount and timing of the resulting cost savings are inherently difficult to predict |
| • the Company may incur significant cash integration costs in achieving cost savings, and any cost savings or other synergies from acquisitions may be offset by such integration costs |
| • the cost savings and other synergies realized from acquisitions may be offset by increases in other expenses, by operating losses, or by problems unrelated to any specific acquisition |
| The Company has exposure to economic downturns and operates in cyclical markets |
| As a supplier of capital equipment to a variety of industries, the Company is adversely affected by general economic downturns |
| Demand for compressor and vacuum products is dependent upon capital spending by manufacturing and process industries |
| Many of the Company’s customers, particularly industrial customers, will delay capital projects, including non-critical maintenance and upgrades, during economic downturns |
| Demand for certain of the Company’s fluid transfer products is primarily tied to the number of working and available drilling rigs and oil and natural gas prices |
| The energy market, in particular, is cyclical in nature as the worldwide demand for oil and natural gas fluctuates |
| When worldwide demand for these commodities is depressed, the demand for the Company’s products used in drilling and recovery applications is reduced |
| Accordingly, the Company’s operating results for any particular period are not necessarily indicative of the operating results for any future period |
| The markets for the Company’s products have historically experienced downturns in demand |
| Future downturns could have a material adverse effect on the Company’s operating results |
| Large or rapid increases in the costs of raw materials or substantial decreases in their availability and the Company’s dependence on particular suppliers of raw materials could materially and adversely affect the Company’s operating results |
| The Company’s primary raw materials are cast iron, aluminum and steel |
| While the Company is seeking to enter into long-term contracts with the its suppliers, most of its suppliers are not currently parties to long-term contracts |
| Consequently, the Company is vulnerable to fluctuations in prices of such raw materials |
| Factors such as supply and demand, freight costs and transportation availability, inventory levels of brokers and dealers, the level of imports and general economic conditions may affect the price of raw materials |
| The Company uses single sources of supply for certain iron castings and other select engineered components |
| From time to time in recent years, the Company has experienced a disruption to its supply deliveries and it may experience further supply disruptions |
| Any such disruption could have a material adverse effect on the Company’s ability to meet its commitments to customers and, therefore, its operating results |
| The Company faces robust competition in the markets it serves, which could materially and adversely affect its operating results |
| The Company actively competes with companies producing the same or similar products |
| Depending on the particular product, the Company experiences competition based on a number of factors, including quality, performance, price and availability |
| The Company competes against many companies, including divisions of larger companies with greater financial resources than the Company |
| As a result, these competitors may be better able to withstand a change in conditions within the markets in which the Company competes and throughout the economy as a whole |
| In addition, new competitors could enter the Company’s markets |
| In particular, it is possible that the Company’s European- and Asian-based competitors could seek to establish a greater presence in the United States market |
| If the Company cannot compete successfully, its sales and operating results could be materially and adversely affected |
| 12 _________________________________________________________________ Economic, political and other risks associated with international sales and operations could adversely affect the Company’s business |
| For the fiscal year ended December 31, 2005, approximately 59prca of the Company’s revenues were from customers in countries outside of the United States |
| The Company has manufacturing facilities in Germany, the United Kingdom, China, Finland, Brazil and Canada |
| The Company anticipates that it may continue to expand its international operations to the extent that suitable opportunities become available |
| Non-US operations and US export sales could be adversely affected as a result of: • nationalization of private enterprises; • political or economic instability in certain countries; • differences in foreign laws, including increased difficulties in protecting intellectual property and uncertainty in enforcement of contract rights; • changes in the legal and regulatory policies of foreign jurisdictions; • credit risks; • currency fluctuations; • exchange controls; • changes in tariff restrictions; • royalty and tax increases; • export and import restrictions and restrictive regulations of foreign governments; • potential problems obtaining supply of raw materials; • shipping products during times of crisis or war; and • other factors inherent in foreign operations |
| The Company’s substantial indebtedness could adversely affect its financial health |
| The Company substantially increased its indebtedness in order to finance the acquisitions consummated in 2004 and 2005, and the high level of indebtedness could have an adverse future effect on its business |
| For example: • the Company may have limited ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of its growth strategy, or other purposes; • a substantial portion of the Company’s cash flow may be used to pay principal and interest on its debt, which will reduce the funds available for working capital, capital expenditures, acquisitions and other purposes; • the Company may be more vulnerable to adverse changes in general economic, industry and competitive conditions; • the various covenants contained in the Company’s senior credit agreement, the indenture governing the senior subordinated notes, and the documents governing its other existing indebtedness may place it at a relative competitive disadvantage as compared to some of its competitors; and • borrowings under the senior credit agreement bear interest at floating rates, which could result in higher interest expense in the event of an increase in interest rates |
| If the Company is in compliance with the covenants set forth in the documents governing its indebtedness, the Company and/or its subsidiaries may be able to incur substantial additional indebtedness |
| If the Company or any of its subsidiaries incur additional indebtedness, the related risks that they now face may intensify |
| 13 _________________________________________________________________ The Company is a defendant in certain asbestos and silicosis personal injury lawsuits, which could adversely affect its financial condition |
| The Company has been named as a defendant in an increasing number of asbestos and silicosis personal injury lawsuits |
| The plaintiffs in these suits allege exposure to asbestos or silica from multiple sources, and typically the Company is one of approximately 25 or more named defendants |
| In the Company’s experience to date, the substantial majority of the plaintiffs have not been physically impaired with a disease for which the Company has responsibility |
| The Company believes that the pending lawsuits will not, in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or liquidity |
| However, future developments, including, without limitation, potential insolvencies of insurance companies, could cause a different outcome |
| Accordingly, there can be no assurance that the resolution of pending or future lawsuits, whether by judgment, settlement, or dismissal, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity |
| The nature of the Company’s products creates the possibility of significant product liability and warranty claims, which could harm its business |
| Customers use some of the Company’s products in potentially hazardous drilling, completion and production applications that can cause injury or loss of life and damage to property, equipment or the environment |
| In addition, the Company’s products are integral to the production process for some end-users and any failure of the Company’s products could result in a suspension of their operations |
| Although the Company maintains strict quality controls and procedures, it cannot be certain that the Company’s products will be completely free from defects |
| The Company maintains amounts and types of insurance coverage that it believes are adequate and consistent with normal industry practice |
| However, the Company cannot guarantee that insurance will be adequate to cover all liabilities incurred |
| The Company also may not be able to maintain insurance in the future at levels it believes are necessary and at rates it considers reasonable |
| The Company may be named as a defendant in product liability or other lawsuits asserting potentially large claims if an accident occurs at a location where its equipment and services have been used |
| Environmental compliance costs and liabilities could adversely affect the Company’s financial condition |
| The Company’s operations and properties are subject to increasingly stringent domestic and foreign laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges, waste management and workplace safety |
| Under such laws and regulations, the Company can be subject to substantial fines and sanctions for violations and be required to install costly pollution control equipment or effect operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases |
| The Company must conform its operations and properties to these laws and regulations |
| The Company uses and generates hazardous substances and wastes in its manufacturing operations |
| In addition, many of its current and former properties are, or have been, used for industrial purposes |
| The Company has been identified as a potentially responsible party with respect to several sites designated for cleanup under federal “Superfund” or similar state laws |
| An accrued liability on its balance sheet reflects costs which are probable and estimable for its projected financial obligations relating to these matters |
| If the Company has underestimated its remaining financial obligations, it may face greater exposure that could have an adverse effect on its financial condition, results of operations or liquidity |
| Stringent fines and penalties may be imposed for non-compliance with regulatory requirements relating to environmental matters, and many environmental laws impose joint and several liability for remediation for cleanup of certain waste sites and for related natural resource damages |
| The Company has experienced, and expects to continue to experience, operating costs to comply with environmental laws and regulations |
| In addition, new laws and regulations, stricter enforcement of existing 14 _________________________________________________________________ laws and regulations, the discovery of previously unknown contamination, or the imposition of new clean-up requirements could require the Company to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on its business, financial condition, results of operations or liquidity |
| The Company’s success depends on its executive officers and other key personnel |
| The Company’s future success depends to a significant degree on the skills, experience and efforts of its executive officers and other key personnel |
| The loss of the services of any of the Company’s executive officers, particularly its Chairman, President and Chief Executive Officer, Ross J Centanni, could have an adverse impact |
| None of the Company’s executive officers has an employment agreement |
| However, the Company has a common stock ownership requirement and provides certain benefits for its executive officers, including change in control agreements, which provide incentives for them to make a long-term commitment to the Company |
| The Company’s future success will also depend on its ability to attract and retain qualified personnel and a failure to attract and retain new qualified personnel could have an adverse effect on its operations |
| The Company’s business could suffer if it experiences employee work stoppages or other labor difficulties |
| As of January 2006, the Company has approximately 6cmam200 full-time employees |
| A significant number of the Company’s employees, including a large portion of the employees outside of the United States, are represented by labor unions |
| Although the Company does not anticipate future work stoppages by its union employees, there can be no assurance that work stoppages will not occur |
| Although the Company believes that its relations with employees are good and has not experienced any recent strikes or work stoppages, it cannot be assured that it will be successful in negotiating new collective bargaining agreements, that such negotiations will not result in significant increases in the cost of labor or that a breakdown in such negotiations will not result in the disruption of the Company’s operations |
| The occurrence of any of the preceding conditions could impair the Company’s ability to manufacture its products and result in increased costs and/or decreased operating results |
| The Company may not be able to continue to make the acquisitions necessary for it to realize its growth strategy |
| One of the Company’s growth strategies is to increase its sales and expand its markets through acquisitions |
| It expects to continue making acquisitions if appropriate opportunities arise |
| However, the Company may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms or otherwise complete future acquisitions |
| Furthermore, the Company’s acquired companies may encounter unforeseen operating difficulties and may require significant financial and managerial resources, which would otherwise be available for the ongoing development or expansion of the Company’s existing operations |
| Third parties may infringe upon the Company’s intellectual property and the Company may expend significant resources enforcing its rights or suffer competitive injury |
| The Company’s success depends in part on its proprietary technology |
| The Company relies on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect its proprietary rights |
| The Company may be required to spend significant resources to monitor and police its intellectual property rights |
| If the Company fails to successfully enforce these intellectual property rights, the Company’s competitive position could suffer, which could harm its operating results |
| 15 _________________________________________________________________ The Company’s pension and other postretirement benefit obligations and expense (or income) are dependent upon assumptions used in calculating such amounts and actual results of investment activity |
| Pension and other postretirement benefit obligations and expense (or income) are dependent on assumptions used in calculating such amounts and actual results of investment activity |
| These assumptions include discount rate, rate of compensation increases, expected return on plan assets and expected healthcare trend rates |
| While the Company believes that the assumptions are appropriate, differences in actual experience or future changes in assumptions may affect the Company’s obligations, future expense and funding requirements |
| A significant portion of the Company’s assets consists of goodwill and other intangible assets, the value of which may be reduced if the Company determines that those assets are impaired |
| As of December 31, 2005, goodwill and other intangible assets represented approximately dlra823dtta8 million, or 48prca of the Company’s total assets |
| Goodwill is generated in an acquisition when the cost of such acquisition exceeds the fair value of the net tangible and identifiable intangible assets acquired |
| Goodwill is no longer amortized under generally accepted accounting principles as a result of SFAS Nodtta 142 |
| Instead, goodwill and certain other identifiable intangible assets are subject to impairment analyses at least annually |
| The Company could be required to recognize reductions in its net income caused by the impairment of goodwill and other intangibles, which, if significant, could materially and adversely affect its results of operations |