GORMAN RUPP CO - Quarter Report: 2005 September (Form 10-Q)

 

 

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 quarterly period ended September 30, 2005            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, Mansfield, Ohio		44903
(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 þ No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No þ

Common shares, without par value, outstanding at September 30, 2005. 10,685,697

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Page 1 of 18 pages

The Gorman-Rupp Company and Subsidiaries
Three and Nine Months Ended September 30, 2005 and 2004

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income -Three months ended September 30, 2005 and 2004 -Nine months ended September 30, 2005 and 2004
Condensed Consolidated Balance Sheets -September 30, 2005 and December 31, 2004
Condensed Consolidated Statements of Cash Flows -Nine months ended September 30, 2005 and 2004
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits
EX-3 Articles of Incorporation and by-laws
EX-4 Instruments defining the rights of security holders, including indentures
EX-10 Material Contracts
EX-31.1 302 CEO Certification
EX-31.2 302 CFO Certification
EX-32 Section 1350 CEO and CFO Certifications
EX-31.1 CEO Certification
EX-31.2 CFO Certification
EX-32 Certification Section 1350, Section 906

PART I. FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Thousands of dollars, except per share amounts)		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net sales		$	58,980			$	52,392			$	167,126			$	152,627
Cost of products sold			47,610				41,532				133,565				120,851
Gross Profit			11,370				10,860				33,561				31,776
Selling, general and administrative expenses			7,127				7,587				21,832				21,553
Operating Income			4,243				3,273				11,729				10,223
Other income			192				6				682				491
Other expense			(189	)			(16	)			(243	)			(60	)
Income Before Income Taxes			4,246				3,263				12,168				10,654
Income taxes			1,571				1,207				4,502				3,942
Net Income		$	2,675			$	2,056			$	7,666			$	6,712
Basic and Diluted Earnings Per Share		$	0.25			$	0.19			$	0.72			$	0.63
Dividends Paid Per Share		$	0.140			$	0.140			$	0.420			$	0.412
Average Shares Outstanding			10,685,697				10,682,697				10,683,708				10,680,206

Shares outstanding and per share data reflect the 5 for 4 stock split effective September 10, 2004.

See notes to condensed consolidated financial statements.

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Thousands of dollars)
		September 30,				December 31,
		2005				2004
Assets
Current Assets:
Cash and cash equivalents		$	12,450			$	16,202
Short-term investments			3,697				2,696
Accounts receivable — net			36,008				32,988
Inventories — net			51,098				38,234
Other current assets and deferred income taxes			6,885				6,525
Total Current Assets			110,138				96,645
Property, plant and equipment			136,018				135,660
less allowances for depreciation			83,887				80,848
Property, Plant and Equipment — Net			52,131				54,812
Other assets			14,171				13,887
Total Assets		$	176,440			$	165,344
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable		$	8,572			$	6,615
Payrolls and related liabilities			3,945				3,412
Accrued expenses			11,736				10,514
Income taxes			3,477				571
Total Current Liabilities			27,730				21,112
Postretirement benefits			23,283				22,334
Shareholders’ Equity
Common shares, without par value:
Authorized - 14,000,000 shares;
Outstanding - 10,685,697 shares in 2005 and 10,682,697 in 2004 (after deducting treasury shares of 395,278 in 2005 and 398,278 in 2004) at stated capital amount			5,095				5,093
Retained earnings			120,502				117,261
Accumulated other comprehensive loss			(170	)			(456	)
Total Shareholders’ Equity			125,427				121,898
Total Liabilities and Shareholders’ Equity		$	176,440			$	165,344

Shares outstanding reflect the 5 for 4 stock split effective September 10, 2004.
See notes to condensed consolidated financial statements.

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Thousands of dollars)		Nine Months Ended
		September 30,
		2005				2004
Cash Flows From Operating Activities:
Net income		$	7,666			$	6,712
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,105				5,387
Changes in operating assets and liabilities			(7,633	)			1,475
Net Cash Provided by Operating Activities			5,138				13,574
Cash Flows From Investing Activities:
Capital additions, net			(2,204	)			(3,341	)
Change in short-term investments			(1,002	)			(2,026	)
Payment for acquisition			(1,331	)			—
Net Cash Used for Investing Activities			(4,537	)			(5,367	)
Cash Flows From Financing Activities:
Cash dividends			(4,487	)			(4,411	)
Net Cash Used for Financing Activities			(4,487	)			(4,411	)
Effect of exchange rate changes on cash			134				102
Net (Decrease) Increase in Cash and Cash Equivalents			(3,752	)			3,898
Cash and Cash Equivalents:
Beginning of year			16,202				16,272
September 30,		$	12,450			$	20,170

See notes to condensed consolidated financial statements.

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, 2005 are not necessarily indicative of results that may be expected for the year ending December 31, 2005. 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, 2004.

Certain prior year amounts have been reclassified to conform to the 2005 presentation.

RESTATEMENT

During the course of the Company’s 2004 financial statement close process, a prior period error relating to the overstatement of a deferred income tax liability was identified. The correction of the error, recognizing an increase to shareholders’ equity and a reduction to deferred tax liability, resulted in a restatement of 2002, 2003 and the first three quarters of 2004 financial statements.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued Statement on Financial Accounting Standards (“SFAS”) No. 151 “Inventory Costs—an amendment of ARB No. 43, Chapter 4.” This Statement amends the guidance in ARB No. 43 to require idle facility expense, freight, handling costs, and wasted material (spoilage) be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of this statement on its financial statements.

FASB Staff Position (“FSP”) 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes,” for the Tax Deduction Provided to U.S. Based Manufacturers by the American Job Creation Act of 2004, and FSP 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings.

FSP No. 109-1 clarifies the application of SFAS No. 109 to the new law’s tax deduction for income attributable to “domestic production activities.” The fully phased-in deduction is up to nine percent of the lesser of taxable income or “qualified production activities income.” The staff proposal would require that the deduction be accounted for as a special deduction in the period earned, not as a tax-rate reduction. Repatriation Provisions within the American Jobs Creation Act of 2004” were enacted on October 22, 2004.

PART I—CONTINUED

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

FSP No. 109-2 provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is permitted time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

NOTE B — INVENTORIES

The major components of inventories are as follows: (net of LIFO reserves)

(Thousands of dollars)		September 30,				December 31,
		2005				2004
Raw materials and in-process		$	27,638			$	20,348
Finished parts			20,495				16,602
Finished products			2,965				1,284
		$	51,098			$	38,234

NOTE C — PRODUCT WARRANTIES

A liability is established for estimated future warranty and service claims based on historical claim experience and specific product failures. The Company expenses warranty costs directly to cost of products sold. Changes in the Company’s product warranty liability are as follows:

(Thousands of dollars)		Nine Months Ended
		September 30,
		2005				2004
Balance at beginning of year		$	829			$	599
Warranty costs			987				1,708
Settlements			(965	)			(1,412	)
Balance at end of quarter		$	851			$	895

PART I—CONTINUED

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

NOTE D — 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.

NOTE E — COMPREHENSIVE INCOME

During the three-month period ended September 30, 2005 and 2004, total comprehensive income was $3,447,000 and $2,446,000, respectively. During the nine-month period ended September 30, 2005 and 2004, total comprehensive income was $7,952,000 and $6,841,000, respectively. The reconciling item between net income and comprehensive income consists of foreign currency translation adjustments.

NOTE F—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 F — Pensions and Other Postretirement Benefits for the year ended December 31, 2004 included in the Form 10-K.)

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

		Pension Benefits								Postretirement Benefits
(Thousands of dollars)		Nine Months Ended								Nine Months Ended
		September 30,								September, 30
		2005				2004				2005				2004
Service cost		$	1,455			$	1,403			$	788			$	785
Interest cost			1,663				1,607				1,331				1,294
Expected return on plan assets			(1,828	)			(1,678	)			—				—
Amortization of prior service cost and unrecognized (gain)/loss			507				408				—				(422	)
Recognized net actuarial (gain)/loss			—				—				223				17
Benefit cost		$	1,797			$	1,740			$	2,342			$	1,674

PART I—CONTINUED

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

In March 2004, the FASB issued Staff Position No. FSP 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 became effective beginning in the third quarter of 2004. During 2005, the Company determined that its current medical plan does not satisfy the “actuarially equivalent” test of the ACT, and therefore the new law will have no effect on the Company.

NOTE G—ACQUISITIONS

In March, 2005 the Company acquired a submersible pump line from a private European company for a cash purchase price of $1,331,000. The acquisition was financed with cash from the Company’s treasury. The addition of this pump line will complement and expand the family of pumps currently offered to international markets.

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 2005 Compared to Third Quarter 2004

Net sales for the third quarter 2005 were $58,980,000 compared to $52,392,000 for the same period 2004, an increase of $6,588,000 or 12.6%. The increase in net sales for the third quarter of 2005 resulted primarily from continued strength in the construction, fire protection and international

PART I—CONTINUED

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

markets. Additionally, increased sales reflected the Company’s emergency response to hurricanes Katrina and Rita.

Cost of products sold for the third quarter 2005 was $47,610,000 compared to $41,532,000 during 2004, an increase of $6,078,000 or 14.6%, primarily due to the higher sales volume. As a percentage of net sales, cost of products sold was 80.7% in 2005, compared to 79.3% in 2004. The increase as a percent of net sales was primarily related to increased raw material costs.

Selling, general, and administrative (“SG&A”) expenses were $7,127,000 in the third quarter 2005 compared to $7,587,000 in 2004, a decrease of $460,000 or 6.1%. As a percentage of net sales, SG&A expenses were 12.1% in 2005 compared to 14.5% in 2004. The decrease in percent of net sales for 2005 was primarily due to higher sales levels. In addition, professional services decreased by $308,000 in 2005.

Income before income taxes for the third quarter 2005 were $4,246,000 compared to $3,263,000 for the same period in 2004, an increase of $983,000 or 30.1%. The effective income tax rate used was 37.0% in 2005 and 2004. Higher income taxes were a direct result of increased profits during the quarter.

Net income for the third quarter 2005 was $2,675,000 compared to $2,056,000 for the same period in 2004, an increase of $619,000 or 30.1%. As a percent of net sales, net income was 4.5% in 2005 compared to 3.9% in 2004. Earnings per share were $0.25 in 2005 compared to $0.19 in 2004, an increase of $0.06 per share.

Nine Months 2005 Compared to Nine Months 2004

Net sales for the nine months ended September 30, 2005 were $167,126,000 compared to $152,627,000 for the same period 2004, an increase of $14,499,000 or 9.5%. The increase in net sales for the nine months 2005 resulted primarily from continued strength in the construction, fire protection and international markets. The backlog of orders at September 30, 2005 was $93,166,000 compared to $65,917,000 at September 30, 2004, an increase of $27,249,000 or 41.3% principally due to increased orders in the construction, fire, rental and government markets. The backlog continues to remain at historically high levels due to increased business activity associated with a stronger capital goods economy.

Cost of products sold for the nine months ended September 30, 2005 was $133,565,000 compared to $120,851,000 during 2004, an increase of $12,714,000 or 10.5%, primarily due to higher sales volume. As a percentage of net sales, cost of products sold was 79.9% in 2005 and 79.2% in 2004. The increase as a percent of net sales was primarily related to increased raw material costs.

Selling, general, and administrative (“SG&A”) expenses were $21,832,000 for the nine months ended September 30, 2005 compared to $21,553,000 in 2004, an increase of $279,000 or 1.3%. As a percentage of net sales, SG&A expenses were 13.1% in 2005 compared to 14.1% in 2004. Increases in SG&A expenses principally resulted from, higher advertising costs of $365,000 related to new product introductions, and the Construction Exposition (CONEXPO) trade show held every three years.

PART I—CONTINUED

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

Income before income taxes for the nine months ended September 30, 2005 was $12,168,000 compared to $10,654,000 for the same period in 2004, an increase of $1,514,000 or 14.2%. The effective income tax rate used was 37.0% in 2005 and 2004.

Net income for the nine months ended September 30, 2005 was $7,666,000 compared to $6,712,000 for the same period in 2004, an increase of $954,000 or 14.2%. As a percent of net sales, net income was 4.6% in 2005 and 4.4% 2004. Earnings per share were $0.72 in 2005 compared to $0.63 in 2004, an increase of $0.09 per share.

Liquidity and Sources of Capital
Cash provided by operating activities during the first nine months in 2005 was $5,138,000 compared to $13,574,000 for the same period in 2004, a decrease of $8,436,000. The decrease was primarily attributable to an inventory build-up of $12,864,000 to support increased business activity of orders scheduled to ship in future periods, and to support new product inventory related to Heating, Ventilation and Air Conditioning (HVAC) pumps.

Cash used for investing activities during the first nine months in 2005 was $4,537,000 compared to $5,367,000 for the same period in 2004, a decrease of $830,000. Investing activities for the nine months ended September 30, 2005 primarily consisted of a payment for the acquisition of a submersible line of pumps amounting to $1,331,000 and net additions to property, plant and equipment of $2,204,000.

Financing activities consisted of payments for dividends, which were $4,487,000 and $4,411,000 for the nine months ended September 30, 2005 and 2004, 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 4.0 to 1 at September 30, 2005 and 4.6 to 1 at September 30, 2004.

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

Current Status of Material Weaknesses in Internal Control Over Financial Reporting
During the course of the Company’s 2004 financial statements close process, one material weakness in the Company’s internal control over financial reporting was identified. The material weakness related to the inadequacy of accounting personnel and certain communication procedures at Patterson Pump

PART I—CONTINUED

ITEM 4. CONTROLS AND PROCEDURES-CONTINUED

Company, a wholly-owned subsidiary, which resulted in an untimely recognition of a decrease in inventory and net income at Patterson Pump Company.

Progress continues to be made in the remediation process to correct the material weakness. The Company has improved the adequacy of accounting personnel through the hiring of two additional staff, including one senior level position. Also, improved lines of reporting to corporate accounting have been incorporated throughout the Company. Additional projects related to inventory control procedures are also in process at Patterson Pump Company, and include additional staffing of inventory control personnel who are assisting in the remediation process. During the third quarter ending September 30, 2005, independent testing of inventory through cycle counts resulted in favorable results, further supporting continued progress in the remediation process. Additional inventory testing will be completed prior to year-end to further validate the inventory balances and process improvements.

Evaluation of Disclosure 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 the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures did maintain effective internal control over financial reporting as of September 30, 2005.

Changes in Internal Control Over Financial Reporting
There were no other changes in the Company’s disclosure controls and procedures that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Subsequent to the date of the evaluation, there have been no significant changes in the Company’s disclosure controls and procedures that could significantly affect the Company’s internal control over financial reporting, other than the corrective actions taken by Gorman-Rupp with respect to Patterson Pump.

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PART II—OTHER INFORMATION

ITEM 6. EXHIBITS

(a)

Exhibits

Exhibits 3, 4 and 10 (articles of incorporation and by-laws; instruments defining the rights of security holders, including indentures; and material contracts) are incorporate herein by this reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Exhibit 31.1 Certification of Jeffrey S. Gorman, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 Certification of Robert E. Kirkendall, Chief Financial Officer, 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

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 7, 2005