GORMAN RUPP CO - Annual Report: 2003 (Form 10-K)

PART I

ITEM 1. BUSINESS

Registrant (“Gorman-Rupp” or the “Company”) designs, manufactures and sells pumps and related equipment (pump and motor controls) for use in water, wastewater, construction, industrial, petroleum, original equipment, agricultural, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications.

PRODUCTS

The principal products of the Company are pumps and fluid control products. (The Company operates principally in one business segment, the manufacture and sale of pumps and related fluid control equipment.) The following table sets forth, for the years 2000 through 2002, the total net sales, income before income taxes and identifiable assets ($000 omitted) of the Company.

The Company’s product line is composed of pump models ranging in size from 1/4” to 84” and ranging in rated capacity from less than one gallon per minute up to 500,000 gallons per minute. The types of pumps which the Company produces include self priming centrifugal, standard centrifugal, magnetic drive centrifugal, axial and mixed flow, rotary gear, diaphragm, bellows and oscillating.

The pumps have drives that range from 1/35 horsepower electric motors up to much larger electric motors or internal combustion engines. Many of the larger units comprise encased, fully integrated sewage pumping stations. In certain cases, units are designed for the inclusion of customer-supplied drives.

The Company’s larger pumps are sold principally for use in the construction, industrial, sewage and waste handling fields; for boosting low residential water pressure; for pumping refined petroleum products, including the ground refueling of aircraft; for agricultural applications; and for fire fighting.

Many of the Company’s smallest pumps are sold to customers for incorporation into such products as X-ray processing equipment; gas air conditioning equipment; office copy machines; chemical feeding, instrumentation and ice cube making machinery; photographic processing and soft drink dispensing equipment; laser cooling applications; graphic arts equipment; and floor cleaning equipment.

On February 28, 2002, the Company acquired all of the issued and outstanding stock of American Machine and Tool Co., Inc. of Pennsylvania (“AMT”). Located in Royersford, Pennsylvania, AMT is a developer and manufacturer of standard centrifugal pumps for industrial and commercial fluid- handling applications. AMT’s primary sales channel is comprised of large-scale distributors of

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ITEM 1. BUSINESS–Continued

industrial supplies promoted through third-party distributor catalogs. The acquisition of AMT offers the Company an opportunity to market commodity-type products and increase sales of AMT’s products through the Company’s existing outlets to domestic and international customers. AMT operates as a wholly owned subsidiary of Gorman-Rupp.

On March 1, 2002, the Company acquired all of the issued and outstanding stock of Flo-Pak, Inc. (“Flo-Pak”). Located in Chamblee, Georgia, Flo-Pak is a manufacturer of designed pumping systems for the HVAC and fire protection markets. The acquisition of Flo-Pak offers the Company an opportunity to diversify its sales into the HVAC product line and to increase its market share in fire protection products. Flo-Pak has been merged into Patterson Pump Company, a wholly owned subsidiary of the Company.

Gorman-Rupp continues to emphasize product development. Several of the Company’s existing products have been re-designed with added features to enable them to be employed in various new applications.

MARKETING

Except for government and export sales, the Company’s pumps are marketed in the United States and Canada through a network of about 1,000 distributors, through manufacturers’ representatives (for sales to many original equipment manufacturers), through third-party distributor catalogs, and by direct sales. The Company is seeking alliances to further enhance marketing opportunities. Government sales are handled directly by the Company; and export sales are made through the Company’s wholly owned subsidiary, The Gorman-Rupp International Company, as well as through foreign distributors and representatives. During 2003, shipments to no single customer exceeded 10.0% of total net sales. (In 2002 and 2001, shipments to one customer approximated 11.6% and 16.7%, respectively, of total net sales.)

In recent years, Gorman-Rupp has actively pursued international business opportunities by, among other efforts, opening facilities outside North America. In 1996, the Company established an office in Greece to improve access to Middle East and European markets. In 1998, Patterson Pump Company’s majority-owned subsidiary, Patterson Pump Ireland Limited, started the assembly of pumps in Ireland to further serve the European market. (In March 2002, Patterson Pump Company acquired the balance of the equity interest in Patterson Pump Ireland Limited.) In 1999, the Mansfield Division opened a warehouse in Grindstead, Denmark to further enhance marketing opportunities in Europe and the Middle East. This warehouse was closed in 2001 and a warehouse near Amsterdam, The Netherlands was opened in January 2002 to better serve those purposes. The Company’s foreign operations do not involve any material risks due to their small size, both individually and collectively.

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Approximately 18% of all 2003 sales were made to customers outside the United States, as compared to 16% in 2002 and 17% in 2001. (Included were sales made to customers in Canada approximating 2% in 2003, 2002 and 2001.) The Company continues its efforts to penetrate international markets principally by its aggressive response to worldwide pump needs.

COMPETITION

Since the late 1990’s, a number of consolidations have occurred within the highly competitive pump industry. Gorman-Rupp estimates that 80 other companies selling pumps and pump units compete in one or more of the lines of business and applications in which comparable products of the Company are utilized. Many pumps are specifically designed and engineered for a particular customer’s application. The Company believes that proper application, product performance and service are the principal methods of competition, and attributes its success to its emphasis in these areas.

PURCHASING AND PRODUCTION

Virtually all materials, supplies, components and accessories used by the Company in the fabrication of its products, including all castings (for which the patterns are made and owned by the Company), structural steel, bar stock, motors, solenoids, engines, seals, and plastic and elastomeric components, are purchased by the Company from other suppliers and manufacturers. No purchases are made under long-term contracts and the Company is not dependent upon a single source for any materials, supplies, components or accessories which are of material importance to its business.

The Company purchases motors, for its polypropylene bellows pumps and magnetic drive pumps from several alternative vendors, and motor components for its large submersible pumps from a limited number of suppliers. Small motor requirements are also currently sourced from alternative suppliers.

The other production operations of the Company consist of the machining of castings, the cutting and shaping of bar stock and structural members, the manufacture of a few minor components, and the assembling, painting and testing of its products. Virtually all of the Company’s products are tested prior to shipment.

OTHER ASPECTS

As of December 31, 2003, the Company employed approximately 978 persons, of whom approximately 575 were hourly employees. The Company has no collective bargaining agreements, has never experienced a strike and considers its labor relations to be satisfactory.

Although the Company owns a number of patents, and several of them are important to its business, Gorman-Rupp believes that the business of the Company is not materially dependent upon any one or more patents.

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ITEM 1. BUSINESS–Continued

As of December 31, 2003, the value of the Company’s backlog of unfilled orders was approximately $58,359,000, of which $38,525,000 was for the unfilled orders of Patterson Pump Company. Approximately 98% of the Company’s backlog of unfilled orders, including the unfilled orders of Patterson Pump Company, is scheduled to be shipped during 2004, with the remainder scheduled to be shipped during 2005. As of December 31, 2002, the value of the backlog of unfilled orders was approximately $70,185,000, of which $46,055,000 was for the unfilled orders of Patterson Pump Company.

AVAILABLE INFORMATION

The Company maintains a website accessible through its Internet address of www.gormanrupp.com. Gorman-Rupp makes available free of charge on or through www.gormanrupp.com its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K, and any amendments thereto, as soon as reasonably practicable after those reports (and any amendments) are electronically filed with or furnished to the Securities and Exchange Commission. (As noted in Gorman-Rupp’s Annual Report to Shareholders, a paper copy of the Company’s Form 10-K is also available free of charge upon written request to the Company’s Corporate Secretary.) However, the information contained on the Company’s website is not a part of this Form 10-K or any other report filed with or furnished to the Commission.

ITEM 2. PROPERTIES

All of the production operations of the Company are conducted at its plants located in Mansfield and Bellville, Ohio; Toccoa and Chamblee, Georgia; St.Thomas, Ontario, Canada; County Westmeath, Ireland; and Royersford, Pennsylvania. The Company owns an approximately 26,000 square foot facility in Sparks, Nevada comprising a training center and warehouse. In addition, the Company leases an approximately 10,000 square foot warehouse facility near Amsterdam, The Netherlands to house pumps and pump parts. All of the Company’s properties, except the leased facilities in Ireland, The Netherlands and Chamblee, Georgia, are owned in fee without any material encumbrance. The Company’s seven production facilities are described below in more detail.

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ITEM 2. PROPERTIES–Continued

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The Company considers its plants, machinery and equipment to be well maintained, in good operating condition and adequate for the present uses and business requirements of the Company.

ITEM 3. LEGAL PROCEEDINGS

Numerous business entities in the pump and fluid-handling industries, as well as a multitude of companies in many other industries, have been targeted in a series of lawsuits in several jurisdictions by various individuals seeking redress to claimed injury as a result of the entities’ alleged use of asbestos in their products. The Company and three of its subsidiaries have been drawn into this mass-scaled litigation, typically as one of hundreds of co-defendants in a particular proceeding. (The vast majority of these cases are against Patterson Pump Company.) The allegations in the lawsuits involving the Company and/or its subsidiaries are vague, general and speculative, and most cases have not advanced beyond the early stage of discovery. In certain situations, the plaintiffs have voluntarily dismissed the Company and/or its subsidiaries from some of the lawsuits after the plaintiffs have acknowledged that there is no basis for their claims. Insurers of the Company have engaged legal counsel to represent the Company and its subsidiaries and to protect their interests.

In addition, the Company and/or its subsidiaries are parties in a small number of legal proceedings arising out of the ordinary course of business. Management does not currently believe that these proceedings, or the industry-wide asbestos litigation, will materially impact the Company’s results of operations, liquidity or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the fiscal year covered by this Form 10-K, no matter was submitted to a vote of the Company’s shareholders, through the solicitation of proxies or otherwise.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G(3), the information regarding executive officers called for by Item 401 of Regulation S-K and by Item 10 of this Form 10-K is set forth below.

Except as noted, each of the above-named officers has held his or her executive position with the Company for the past five years. Mr. J. C. Gorman served as the Company’s President from 1964 until 1989, and as Chief Executive Officer from 1964 until 1996. (He has served as a Director of the Company continuously since 1946.) Mr. J. S. Gorman was elected President and Chief Executive Officer effective May 1, 1998, after having served as Senior Vice President since 1996. Mr. J. S. Gorman has held the position of General Manager of the Mansfield Division since 1989. He served as Assistant General Manager from 1986 to 1988; and he held the office of Corporate Secretary from 1982 to 1990. (He has served as a Director of the Company continuously since 1989.) Mr. Kirkendall was elected as Senior Vice President, Chief Financial Officer and Assistant Corporate Secretary in 2003. He was elected as Senior Vice President and Assistant Corporate Secretary in 2002; and served as Vice President Corporate Development from 1999 to 2002, Corporate Secretary from 1990 to 2002 and Assistant Treasurer from 1982 to 1999. Mr. Danuloff was elected Vice President Information Technology (formerly Vice President Information Services) in 1991, after having served as Director of Information Services from 1981 to 1991. Ms. Sovine was elected Treasurer in 2001. She served as Assistant Treasurer from 1999 to 2001 and prior to 1999 held a variety of financial management positions within the Company. Mr. Emmens joined the Company as Corporate Counsel in 1997, and was elected as Corporate Secretary in 2002. He served as Assistant Corporate Secretary from 1999 to 2002.

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Mr. J. S. Gorman is the son of Mr. J. C. Gorman. Mr. Christopher H. Lake, a Director of the Company, is the son of Dr. Peter B. Lake, also a Director. There are no other family relationships among any of the Executive Officers and Directors of the Company.

PART II

Attention is directed to the section “Ranges of Stock Prices” and the data immediately below pertaining to the shareholder information reported by the Transfer Agent and Registrar on page 30 in the Company’s 2003 Annual Report to Shareholders, which are incorporated herein by this reference.

None of the Company’s Common Shares were sold by the Company during the period covered by this Form 10-K that were not registered under the Securities Act of 1933.

The Company did not repurchase any of its Common Shares during the fourth quarter of the period covered by this Form 10-K.

ITEM 6.  SELECTED FINANCIAL DATA

Attention is directed to the section “Eleven Year Summary of Selected Financial Data” on pages 26 and 27 in the Company’s 2003 Annual Report to Shareholders, which is incorporated herein by this reference.

Attention is directed to the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 21-25, and to the “Safe Harbor Statement” on page 31, in the Company’s 2003 Annual Report to Shareholders, which are incorporated herein by this reference.

Attention is directed to the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 21-25, and to the “Safe Harbor Statement” on page 31, in the Company’s 2003 Annual Report to Shareholders, which are incorporated herein by this reference. The Company’s foreign operations do not involve any material risks due to their small size, both individually and collectively. As indicated in paragraph 3 on page 23 referenced above, the Company has no material market risk exposures required to be reported by Item 305 of Regulation S-K.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Attention is directed to the Company’s consolidated financial statements, the notes thereto and the report of independent auditors thereon on pages 10-20, and to the section “Summary of Quarterly Results of Operations” on pages 26 and 27, in the Company’s 2003 Annual Report to Shareholders, which are incorporated herein by this reference.

The Company has not changed its independent public accountants and there have been no reportable disagreements with such accountants regarding accounting principles or practices or financial disclosure matters.

ITEM 9A. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. An evaluation was carried out under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective.

Subsequent to the date of their evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

With respect to Directors, attention is directed to the sections “Election of Directors” and “Board of Directors and Directors’ Committees” in the Company’s definitive Notice of 2004 Annual Meeting of Shareholders and related Proxy Statement (filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which are incorporated herein by this reference.

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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT–Continued

With respect to executive officers, attention is directed to Part I of this Form 10-K.

The Company has adopted a Code of Ethics that applies to its President and Chief Executive Officer, Senior Vice President and Chief Financial Officer, and Treasurer. The Code of Ethics is set forth as an exhibit to this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Attention is directed to the sections “Board of Directors and Directors’ Committees”, “Executive Compensation”, “Pension and Retirement Benefits”, “Salary Committee Report on Executive Compensation” and “Shareholder Return Performance Presentation” in the Company’s definitive Notice of 2004 Annual Meeting of Shareholders and related Proxy Statement (filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which are incorporated herein by this reference.

Attention is directed to the sections “Principal Shareholders”, “Election of Directors” and “Shareholdings by Executive Officers” in the Company’s definitive Notice of 2004 Annual Meeting of Shareholders and related Proxy Statement (filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which are incorporated herein by this reference.

On May 22, 1997, the Company’s Board of Directors adopted a Non-Employee Directors’ Compensation Plan. This Plan became effective without shareholder approval and constitutes the Company’s only equity compensation plan. The Plan provides for share compensation for regular services performed by each of the Company’s non-employee Directors. In addition to cash compensation, non-employee Directors receive an automatic award of 500 Common Shares (from the Company’s treasury) on each July 1 (through 2006). The number of Common Shares which may be awarded under the Plan cannot exceed 50,000. As of December 31, 2003, 19,500 Common Shares had been issued to non-employee Directors and 30,500 Common Shares remained available for future issuance. No options, warrants or rights are available for issuance under the Plan. Attention is directed to the section “Board of Directors and Directors’ Committees” in the Company’s definitive Notice of 2004 Annual Meeting of Shareholders and related Proxy Statement (filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which is incorporated herein by this reference.

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EQUITY COMPENSATION PLAN INFORMATION

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has no relationships or transactions required to be reported by Item 404 of Regulation S-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Attention is directed to the section “Appointment of Independent Public Accountants” in the Company’s definitive Notice of 2004 Annual Meeting Of Shareholders and related Proxy Statement (filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K), which is incorporated herein by this reference.

PART IV

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(b)  Reports on Form 8-K

A Form 8-K related to the Company’s third quarter earnings release was filed with the Securities and Exchange Commission on October 17, 2003 (the last quarter of the period covered by this Form10-K).

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

THE GORMAN-RUPP COMPANY

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

*The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K on behalf of The Gorman-Rupp Company and on behalf of each of the above-named Officers and Directors of The Gorman-Rupp Company pursuant to Powers of Attorney executed by The Gorman-Rupp Company and by each such Officer and Director and filed with the Securities and Exchange Commission.

March 10, 2004

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ANNUAL REPORT ON FORM 10-K

THE GORMAN-RUPP COMPANY

For the Year Ended December 31, 2003

EXHIBIT INDEX

                              EXHIBIT

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