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GORMAN RUPP CO - Quarter Report: 2004 September (Form 10-Q)

The Gorman-Rupp Company 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2004   Commission File Number 1-6747

The Gorman-Rupp Company


(Exact name of registrant as specified in its charter)
     
Ohio   34-0253990

 
 
 
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
305 Bowman Street, P.O. Box 1217, Mansfield, Ohio   44901

 
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (419) 755-1011

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). Yes [X] No [  ]

Common shares, without par value, outstanding at September 30, 2004. 10,682,697

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Page 1 of 17 pages


The Gorman-Rupp Company and Subsidiaries
Three and Nine Months Ended September 30, 2004 and 2003

             
PART I. FINANCIAL INFORMATION
    Item 1. Financial Statements (Unaudited)
        Condensed Consolidated Statements of Income
          -Three months ended September 30, 2004 and 2003
          -Nine months ended September 30, 2004 and 2003
        Condensed Consolidated Balance Sheets
          -September 30, 2004 and December 31, 2003
        Condensed Consolidated Statements of Cash Flows
          -Nine months ended September 30, 2004 and 2003
    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    Item 3. Quantitative and Qualitative Disclosures of Market Risk
    Item 4. Controls and Procedures
PART II. OTHER INFORMATION
    Item 6. Exhibits and Reports on 8-K
    EX-31.1 302 CEO Certification
    EX-31.2 302 CFO Certification
    EX-32 906 CEO and CFO Certifications
 EX-31.1 Certification by Jeffrey S. Gorman, CEO
 EX-31.2 Certification by Robert E. Krikendall, CFO
 EX-32 Certification Pursuant to 18 U.S.C. Section 1350

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PART I. FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                                 
     Three Months Ended   Nine Months Ended
    Sept 30,   Sept 30,
(Thousands of dollars, except per share amounts)   2004
  2003
  2004
  2003
Net sales
  $ 52,392     $ 53,500     $ 152,627     $ 146,667  
Cost of products sold
    41,532       42,272       120,851       115,804  
 
   
 
     
 
     
 
     
 
 
Gross Profit
    10,860       11,228       31,776       30,863  
Selling, general and administrative expenses
    7,587       7,382       21,553       21,347  
 
   
 
     
 
     
 
     
 
 
Operating Income
    3,273       3,846       10,223       9,516  
Other income
    6       304       491       815  
Other expense
    (16 )     (36 )     (60 )     (130 )
 
   
 
     
 
     
 
     
 
 
Income Before Income Taxes
    3,263       4,114       10,654       10,201  
Income taxes
    1,207       1,559       3,942       3,877  
 
   
 
     
 
     
 
     
 
 
Net Income
  $ 2,056     $ 2,555     $ 6,712     $ 6,324  
 
   
 
     
 
     
 
     
 
 
Basic And Diluted Earnings Per Share
  $ 0.19     $ 0.24     $ 0.63     $ 0.59  
Dividends Paid Per Share
  $ 0.14     $ 0.14     $ 0.41     $ 0.41  
Average Shares Outstanding
    10,682,697       10,678,947       10,680,206       10,676,461  

Per share and share data reflects the 5 for 4 stock split effective September 10, 2004.

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THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                 
    September 30,   December 31,
(Thousands of dollars)   2004
  2003
Assets
               
Current Assets:
               
Cash and cash equivalents
  $ 20,170     $ 16,272  
Short-term investments
    3,200       1,174  
Accounts receivable — net
    35,344       32,148  
Inventories — net
    35,629       38,062  
Other current assets and deferred income taxes
    7,290       6,606  
 
   
 
     
 
 
Total Current Assets
    101,633       94,262  
Property, plant and equipment
    135,056       132,617  
less allowances for depreciation
    82,648       78,279  
 
   
 
     
 
 
Property, Plant and Equipment — Net
    52,408       54,338  
Other assets
    12,116       12,339  
 
   
 
     
 
 
Total Assets
  $ 166,157     $ 160,939  
 
   
 
     
 
 
Liabilities and Shareholders’ Equity
               
Current Liabilities:
               
Accounts payable
  $ 6,362     $ 6,163  
Payrolls and related liabilities
    3,752       3,162  
Accrued expenses
    11,382       10,041  
Income taxes
    2,657       2,542  
 
   
 
     
 
 
Total Current Liabilities
    24,153       21,908  
Postretirement benefits
    23,033       22,569  
Shareholders’ Equity
               
Common shares, without par value:
               
Authorized - 14,000,000 shares;
               
Outstanding - 10,682,697 shares in 2004 and 10,678,947 in 2003 (after deducting treasury shares of 398,278 in 2004 and 402,028 in 2003) at stated capital amount
    5,093       5,091  
Retained earnings
    114,735       112,357  
Accumulated other comprehensive loss
    (857 )     (986 )
 
   
 
     
 
 
Total Shareholders’ Equity
    118,971       116,462  
 
   
 
     
 
 
Total Liabilities and Shareholders’ Equity
  $ 166,157     $ 160,939  
 
   
 
     
 
 

Shares reflect the 5 for 4 stock split effective September 10, 2004.

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THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Nine Months Ended
    September 30,
(Thousands of dollars)   2004
  2003
Cash Flows From Operating Activities:
               
Net income
  $ 6,712     $ 6,324  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    5,387       5,359  
Changes in operating assets and liabilities
    1,577       (652 )
 
   
 
     
 
 
Net Cash Provided by Operating Activities
    13,676       11,031  
Cash Flows From Investing Activities:
               
Capital additions, net
    (3,341 )     (2,915 )
Change in short-term investments
    (2,026 )     (1,500 )
 
   
 
     
 
 
Net Cash Used For Investing Activities
    (5,367 )     (4,415 )
Cash Flows From Financing Activities:
               
Cash dividends
    (4,411 )     (4,356 )
Repayments to bank and note holders
          (145 )
 
   
 
     
 
 
Net Cash Used for Financing Activities
    (4,411 )     (4,501 )
 
   
 
     
 
 
Net Increase in Cash and Cash Equivalents
    3,898       2,115  
Cash and Cash Equivalents:
               
Beginning of year
    16,272       13,086  
 
   
 
     
 
 
September 30,
  $ 20,170     $ 15,201  
 
   
 
     
 
 

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PART I—CONTINUED

ITEM 1.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A — BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

The accompanying income statement, dated September 30, 2004, of The Gorman-Rupp Company differs from and supersedes the income statement furnished with the Form 8-K filed October 25, 2004. The Company’s cost of product sold and selling, general and administrative expenses have been adjusted to include amortization expense, which was originally included in other expense.

Certain prior year amounts have been reclassified to conform to the 2004 presentation.

NOTE B — INVENTORIES

The major components of inventories are as follows:

                 
    September 30,   December 31,
(Thousands of dollars)
 
  2004
  2003
Raw materials and in-process
  $ 20,114     $ 21,488  
Finished parts
    14,223       15,194  
Finished products
    1,292       1,380  
 
   
 
     
 
 
 
  $ 35,629     $ 38,062  
 
   
 
     
 
 

NOTE C — SHAREHOLDERS’ EQUITY

On July 22, 2004, the Company announced a 5 for 4 common stock split effective September 10, 2004 to shareholders of record as of August 13, 2004. The outstanding common stock was increased from 8,546,553 shares without par value to 10,682,697 shares without par value. Share and per share data for all periods presented have been restated to reflect the stock split.

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PART I—CONTINUED

NOTE D – COMPREHENSIVE INCOME

During the three-month period ended September 30, 2004 and 2003, total comprehensive income was $2,446,000 and $2,534,000, respectively. During the nine-month period ended September 30, 2004 and 2003, total comprehensive income was $6,841,000 and $6,997,000, respectively. The reconciling item between net income and comprehensive income consists of foreign currency translation adjustments.

NOTE E—PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors a defined benefit pension plan covering substantially all employees. The Company also sponsors a non-contributory defined benefit health care plan that provides health benefits to retirees and their spouses. (See Note E – Pensions and Other Postretirement Benefits for the year ended December 31, 2003 included in the Form 10-K.)

The following table presents the components of net periodic benefit cost:

                                 
    Pension Benefits
  Postretirement Benefits
    Nine Months Ended   Nine Months Ended
    September 30,   September 30,
(Thousands of dollars)   2004
  2003
  2004
  2003
Service cost
  $ 1,403     $ 1,246     $ 785     $ 719  
Interest cost
    1,607       1,623       1,294       1,225  
Expected return on plan assets
    (1,678 )     (1,477 )            
Amortization of prior service cost and unrecognized (gain)/loss
    408       398       (422 )     (567 )
Recognized net actuarial (gain)/loss
                17       17  
Settlement loss
          1,250              
 
   
 
     
 
     
 
     
 
 
Benefit cost
  $ 1,740     $ 3,040     $ 1,674     $ 1,394  
 
   
 
     
 
     
 
     
 
 

During 2003, the Company’s accumulated distributions to retirees exceeded pension service and interest costs requiring a portion of previously unrecognized pension losses associated with the distribution to be expensed. The additional pension cost of $1,250,000 represents a settlement loss resulting in an allocation of $875,000 to manufacturing expense and $375,000 to selling, general and administrative expense.

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PART I—CONTINUED

NOTE E—PENSION AND OTHER POSTRETIREMENT BENEFITS

In March 2004, the FASB issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,”(“FSP No. 106-2”) in response to a new law regarding prescription drug benefits under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Currently, Statement of Financial Accounting Standard No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“No. 106”) requires that changes in relevant law be considered in current measurement of postretirement benefit costs. FSP No. 106-2 is effective beginning in the third quarter of 2004.

However, the Company’s measures of the accumulated postretirement benefit obligation and the net periodic postretirement benefit cost do not reflect the effects of the subsidy, because it has not yet been concluded whether the benefits under the Company’s plan are actuarially equivalent to Medicare Part D.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this section and elsewhere herein contain various forward-looking statements and include assumptions concerning The Gorman-Rupp Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, The Gorman-Rupp Company provides the following cautionary statement identifying important economic, political, and technological factors, among others, the absence of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such factors include the following: (1) continuation of the current and projected future business environment, including interest rates and capital and consumer spending; (2) competitive factors and competitor responses to Gorman-Rupp initiatives; (3) successful development and market introductions of anticipated new products; (4) stability of government laws and regulation, including taxes; (5) stable governments and business conditions in emerging economies; (6) successful penetration of emerging economies and (7) continuation of the favorable environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates.

Third Quarter 2004 Compared to Third Quarter 2003

Net sales for the third quarter 2004 were $52,392,000 compared to $53,500,000 for the same period 2003, a decrease of $1,108,000 or 2.1%. The decline in net sales for the third quarter of 2004 resulted primarily from decisions made by municipalities to postpone certain capital spending projects.

Cost of products sold for the third quarter 2004 was $41,532,000 compared to $42,272,000 during 2003, a decrease of $740,000 or 1.8%, primarily due to lower sales volume. As a percentage of net sales, cost of products sold was 79.3% in 2004, compared to 79.0% in 2003. The change in percent of net sales in the third quarter 2004 was primarily attributable to higher material costs from suppliers and product mix; partially offset by lower pension costs of $875,000 discussed below.

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PART I—CONTINUED

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Selling, general, and administrative (“S,G&A”) expenses were $7,587,000 in the third quarter 2004 compared to $7,382,000 in 2003, an increase of $205,000 or 2.8%. As a percentage of net sales, S,G&A expenses were 14.5% in 2004 compared to 13.8% in 2003. Increases in S,G&A expenses principally resulted from higher professional service fees of $270,000 relating to compliance requirements of the Sarbanes-Oxley Act of 2002 and higher marketing cost of $260,000 related to product promotion. These increases in S,G&A expenses were partially offset by lower pension costs of $375,000 discussed below.

Pension expense decreased in the third quarter 2004, principally due to a transaction in the third quarter 2003 when the Company’s accumulated distributions to retirees exceeded pension service and interest costs requiring a portion of previously unrecognized pension losses associated with the distribution to be expensed. The additional pension cost of $1,250,000 represents a settlement loss resulting in an allocation of $875,000 to cost of product sold and $375,000 to selling, general and administrative expense.

Other income in the current quarter 2004 was $6,000 compared to $304,000 for the same period in 2003, a decrease of $298,000. The decrease principally resulted from the unfavorable impact of currency translation on inter-company transactions during the third quarter 2004 compared to the same period 2003.

Income before income taxes for the third quarter 2004 was $3,263,000 compared to $4,114,000 for the same period in 2003, a decrease of $851,000 or 20.7%. The effective income tax rate was 37.0% in 2004 and 37.9% in 2003.

Net income for the third quarter 2004 was $2,056,000 compared to $2,555,000 for the same period in 2003, a decrease of $499,000 or 19.5%. As a percent of net sales, net income was 3.9% in 2004 compared to 4.8% in 2003. Earnings per share, stated to reflect the 5 for 4 stock split effective September 10, 2004, was $0.19 in 2004 compared to $0.24 in 2003, a decrease of $0.05 per share.

Nine Months 2004 Compared to Nine Months 2003

Net sales for the nine months ended September 30, 2004 were $152,627,000 compared to $146,667,000 for the same period 2003, an increase of $5,960,000 or 4.1%. The increase in the nine months 2004 net sales primarily reflects the general economic recovery. The backlog of orders at September 30, 2004 was $65,917,000 compared to $58,453,000 at September 30, 2003, an increase of $7,464,000 or 12.8%. The increase during the period was principally due to increased orders for custom pumps.

Cost of products sold for the first nine months 2004 was $120,851,000 compared to $115,804,000 during 2003, an increase of $5,047,000 or 4.3%, primarily due to higher sales volume. As a percentage of sales, cost of products sold was 79.2% in 2004 compared to 79.0% in 2003. Higher material costs from suppliers and product mix principally offset the favorable impact from lower pension costs of $875,000 discussed below.

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PART I—CONTINUED

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

S,G&A expenses for the nine months ended September 30, 2004 were $21,553,000 compared to $21,347,000 in the same period 2003; an increase of $206,000. As a percent of net sales, S,G&A expenses were 14.1% in 2004 compared to 14.6% in 2003. The improvement in rate of .5% resulted from the benefit of increased sales and reduced pension expense discussed below.

Pension expense decreased for the nine months 2004, principally due to a transaction in the third quarter 2003 when the Company’s accumulated distributions to retirees exceeded pension service and interest costs requiring a portion of previously unrecognized pension losses associated with the distribution to be expensed. The additional pension cost of $1,250,000 represents a settlement loss resulting in an allocation of $875,000 to cost of product sold and $375,000 to selling, general and administrative expense.

Other income was $491,000 in 2004 compared to $815,000 in 2003, a decrease of $324,000 or 39.8%. The decrease principally resulted from the unfavorable impact of currency translation on inter-company transactions of $471,000; partially offset by an increase in interest income of $91,000 during the first nine months 2004, compared to the same period 2003.

Income before income taxes for the first nine months in 2004 was $10,654,000 compared to $10,201,000 in the same period in 2003, an increase of $453,000 or 4.4%. The effective income tax rate was 37.0% in 2004 and 38.0% in 2003.

Net income for the first nine months in 2004 was $6,712,000 compared to $6,324,000 in the same period in 2003, an increase of $388,000 or 6.1%. As a percent of net sales, net income was 4.4% in the nine months in 2004 compared to 4.3% in 2003. Earnings per share, stated to reflect the 5 for 4 stock split effective September 10, 2004, were $0.63 in 2004 compared to $0.59 in 2003, an increase of $0.04 per share.

Liquidity and Sources of Capital

Cash provided by operating activities during the first nine months in 2004 was $13,676,000, compared to $11,031,000 September 30, 2003, an increase of $2,645,000. The improvement was primarily attributable to a decrease in inventory and a favorable variance in accounts receivable compared to nine months 2003. These improvements reflect inventory management and the timing of collections. A reduction in income taxes payable and an increase in prepaid pension partially offset the improvement in cash provided by operating activities.

Investing activities included payments for normal capital additions of $3,341,000 and $2,915,000 for the nine months ended September 30, 2004 and 2003, respectively. The Company also increased its short-term investments by $2,026,000 during the nine months ended September 30, 2004.

Financing activities consisted of payments primarily for dividends, which were $4,411,000, and $4,356,000 for the nine months ended September 30, 2004 and 2003, respectively.

The Company continues to finance its capital expenditures and working capital requirements principally through internally generated funds, available unsecured lines of credit from several banks and proceeds from short-term investments. The ratio of current assets to current liabilities was 4.2 to 1 at September 30, 2004 and 4.3 to 1 at December 31, 2003.

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PART I—CONTINUED

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company presently has adequate working capital and borrowing capacity and a strong liquidity position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

The Company’s foreign operations do not involve any material risks due to their small size, both individually and collectively. The Company is not exposed to material market risks as a result of its export sales or operations outside of the United States. Export sales are denominated predominately in U.S. dollars and made on open account or under letters of credit.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation under the supervision and participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, which disclosed no significant deficiencies or material weaknesses, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end the period covered by this quarterly report. There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II—OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

             
(a)   Exhibits
 
           
      Exhibit 31.1   Certification by Jeffrey S. Gorman, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
           
      Exhibit 31.2   Certification by Robert E. Kirkendall, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
           
      Exhibit 32   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
           
(b)   Reports filed on Form 8-K during the Quarter ended September 30, 2004
    A Form 8-K related to earnings release was filed on July 23, 2004.
    A Form 8-K announcing a 5 for 4 stock split was filed on July 26, 2004.

SIGNATURES

Pursuant to the requirements 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
     
 
      (Registrant)
Date: November 9, 2004
       
 
       
  By:   /s/Judith L. Sovine
     
 
      Judith L. Sovine
Corporate Treasurer
 
       
  By:   /s/Robert E. Kirkendall
     
 
      Robert E. Kirkendall
Senior Vice President and
Chief Financial Officer

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