GORMAN RUPP CO - Quarter Report: 2005 June (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 June 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

Common shares, without par value, outstanding at June 30, 2005. 10,682,697

 

 

Page 1 of 19 pages

The Gorman-Rupp Company and Subsidiaries
Three and Six Months Ended June 30, 2005 and 2004

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Statements of Income

—Three months ended June 30, 2005 and 2004

—Six months ended June 30, 2005 and 2004

Condensed Consolidated Balance Sheets

—June 30, 2005 and December 31, 2004

Condensed Consolidated Statements of Cash Flows

—Six months ended June 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-31.1 302 Certification - CEO

EX-31.2 302 Certification - CFO

EX-32 Section 1350 CEO and CFO Certifications

PART I. FINANCIAL INFORMATION

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Thousands of dollars, except per share amounts)		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net sales		$	56,109			$	50,804			$	108,146			$	100,235
Cost of products sold			43,703				39,984				85,955				79,319
Gross Profit			12,406				10,820				22,191				20,916
Selling, general and administrative expenses			7,274				7,102				14,705				13,966
Operating Income			5,132				3,718				7,486				6,950
Other income			173				195				490				485
Other expense			(7	)			(25	)			(54	)			(44	)
Income Before Income Taxes			5,298				3,888				7,922				7,391
Income taxes			1,961				1,439				2,931				2,735
Net Income		$	3,337			$	2,449			$	4,991			$	4,656
Basic and Diluted Earnings Per Share		$	0.32			$	0.23			$	0.47			$	0.44
Dividends Paid Per Share		$	0.140			$	0.136			$	0.280			$	0.272
Average Shares Outstanding			10,682,697				10,678,947				10,682,697				10,678,947

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

(Thousands of dollars)
		June 30,				December 31,
		2005				2004
Assets
Current Assets:
Cash and cash equivalents		$	12,542			$	16,202
Short-term investments			3,047				2,696
Accounts receivable — net			34,331				32,988
Inventories — net			46,667				38,234
Other current assets and deferred income taxes			5,504				6,525
Total Current Assets			102,091				96,645
Property, plant and equipment			134,322				135,660
less allowances for depreciation			82,028				80,848
Property, Plant and Equipment — Net			52,294				54,812
Other assets			15,366				13,887
Total Assets		$	169,751			$	165,344
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable		$	6,720			$	6,615
Payrolls and related liabilities			3,919				3,412
Accrued expenses			10,626				10,514
Income taxes			2,128				571
Total Current Liabilities			23,393				21,112
Postretirement benefits			22,946				22,334
Shareholders’ Equity
Common shares, without par value:
Authorized — 14,000,000 shares;
Outstanding — 10,682,697 shares in 2005 and 2004 (after deducting treasury shares of 398,278 in 2005 and 2004) at stated capital amount			5,093				5,093
Retained earnings			119,261				117,261
Accumulated other comprehensive loss			(942	)			(456	)
Total Shareholders’ Equity			123,412				121,898
Total Liabilities and Shareholders’ Equity		$	169,751			$	165,344

See notes to condensed consolidated financial statements.

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

(Thousands of dollars)		Six Months Ended
		June 30,
		2005				2004
Cash Flows From Operating Activities:
Net income		$	4,991			$	4,656
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,441				3,588
Changes in operating assets and liabilities			(6,594	)			2,380
Net Cash Provided by Operating Activities			1,838				10,624
Cash Flows From Investing Activities:
Capital additions, net			(726	)			(2,545	)
Change in short-term investments			(351	)			(1,443	)
Payment for acquisition			(1,331	)			—
Net Cash Used for Investing Activities			(2,408	)			(3,988	)
Cash Flows From Financing Activities:
Cash dividends			(2,991	)			(2,905	)
Net Cash Used for Financing Activities			(2,991	)			(2,905	)
Effect of exchange rate changes on cash			(99	)			(75	)
Net (Decrease) Increase in Cash and Cash Equivalents			(3,660	)			3,656
Cash and Cash Equivalents:
Beginning of year			16,202				16,272
June 30,		$	12,542			$	19,928

See notes to condensed consolidated financial statements.

PART I—CONTINUED

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 six month periods ended June 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 May 2005, the FASB issued Statement on Financial Accounting Standards (“SFAS”) No. 154 “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” The statement applies to all voluntary changes in accounting principles and corrections of errors. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The statement requires retrospective application to prior periods’ financial statements for changes in accounting principle and error correction, unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will apply provisions of this statement at that time if accounting changes or error corrections are necessary.

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

PART I—CONTINUED

Repatriation Provisions within the American Jobs Creation Act of 2004” were enacted on October 22, 2004.

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.

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)		June 30,				December 31,
		2005				2004
Raw materials and in-process		$	24,836			$	20,348
Finished parts			20,264				16,602
Finished products			1,567				1,284
		$	46,667			$	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:

PART I—CONTINUED

(Thousands of dollars)		Six Months Ended
		June 30,
		2005				2004
Balance at beginning of year		$	829			$	599
Warranty costs			492				664
Settlements			(541	)			(829	)
Balance at end of quarter		$	780			$	434

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 June 30, 2005 and 2004, total comprehensive income was $3,020,000 and $2,433,000, respectively. During the six-month period ended June 30, 2005 and 2004, total comprehensive income was $4,505,000 and $4,395,000, 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:

PART I—CONTINUED

		Pension Benefits								Postretirement Benefits
(Thousands of dollars)		Six Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Service cost		$	970			$	935			$	525			$	523
Interest cost			1,109				1,071				888				863
Expected return on plan assets			(1,219	)			(1,118	)			—				—
Amortization of prior service cost and unrecognized (gain)/loss			338				272				—				(281	)
Recognized net actuarial (gain)/loss			—				—				149				11
Benefit cost		$	1,198			$	1,160			$	1,562			$	1,116

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. In 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

PART I—CONTINUED

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.

Second Quarter 2005 Compared to Second Quarter 2004

Net sales for the second quarter 2005 were $56,109,000 compared to $50,804,000 for the same period 2004, an increase of $5,305,000 or 10.4%. The increase in net sales for the second quarter of 2005 resulted primarily from continued strength in the construction, fire protection and international markets. The increased sales reflected the continuing improvement in the capital goods sector in response to the general economic recovery.

Cost of products sold for the second quarter 2005 was $43,703,000 compared to $39,984,000 during 2004, an increase of $3,719,000 or 9.3%, primarily due to the higher sales volume. As a percentage of net sales, cost of products sold was 77.9% in 2005, compared to 78.7% in 2004. The reduction in percent of net sales for the second quarter 2005 was a result of increased absorption of fixed expenses resulting from higher production levels in direct proportion to the sales increase, and the effect of increased selling prices of 3% to 5%. The second quarter benefited from the full effect of price increases implemented in previous quarters.

Selling, general, and administrative (“SG&A”) expenses were $7,274,000 in the second quarter 2005 compared to $7,102,000 in 2004, an increase of $172,000 or 2.4%. As a percentage of net sales, SG&A expenses were 13.0% in 2005 compared to 14.0% in 2004. The decrease in percent of net sales for 2005 was primarily due to higher sales levels, somewhat offset by higher spending for advertising of $82,000.

Other income in the current quarter 2005 was $173,000 compared to $195,000 for the same period in 2004, a decrease of $22,000.

Other expense in the current quarter 2005 was $7,000 compared to $25,000 for the same period in 2004, a decrease of $18,000.

Income before income taxes for the second quarter 2005 was $5,298,000 compared to $3,888,000 for the same period in 2004, an increase of $1,410,000 or 36.3%. The effective income tax rate was 37.0% in 2005 and 2004.

PART I—CONTINUED

Net income for the second quarter 2005 was $3,337,000 compared to $2,449,000 for the same period in 2004, an increase of $888,000 or 36.3%. As a percent of net sales, net income was 6.0% in 2005 compared to 4.8% in 2004. Earnings per share was $0.32 in 2005 compared to $0.23 in 2004, an increase of $0.09 per share.

Six Months 2005 Compared to Six Months 2004

Net sales for the six months ended June 30, 2005 were $108,146,000 compared to $100,235,000 for the same period 2004, an increase of $7,911,000 or 7.9%. The increase in net sales for the six months 2005 resulted primarily from continued strength in the construction, fire protection and international markets. The backlog of orders at June 30, 2005 was $87,152,000 compared to $60,302,000 at June 30, 2004, an increase of $26,850,000 or 44.5% principally due to increased business in the construction, rental and government markets. The increased sales reflected the continuing improvement in the capital goods sector in response to the general economic recovery.

Cost of products sold for the six months ended June 30, 2005 was $85,955,000 compared to $79,319,000 during 2004, an increase of $6,636,000 or 8.4%, primarily due to higher sales volume. As a percentage of net sales, cost of products sold was 79.5% in 2005, compared to 79.1% in 2004. The increase in percent of net sales for the six months ending June 30, 2005 was due to increased raw material costs in the first quarter that were not yet fully offset by increased selling prices that were realized in the second quarter of 2005. Raw material costs from vendors have begun to stabilize during the past few months. Additionally, increased absorption of fixed expenses resulting from increased production levels partially offset the increased raw material costs.

Selling, general, and administrative (“SG&A”) expenses were $14,705,000 for the six months ended June 30, 2005 compared to $13,966,000 in 2004, an increase of $739,000 or 5.3%. As a percentage of net sales, SG&A expenses were 13.6% in 2005 compared to 13.9% in 2004. Increases in SG&A expenses principally resulted from higher auditing fees of $208,000 related to compliance requirements of the Sarbanes-Oxley Act of 2002, higher marketing costs of $260,000 related to product promotion at a CONEXPO show held every three years and increased wages and benefits of $139,000.

Other income for the six months ended June 30, 2005 was $490,000 compared to $485,000 for the same period in 2004, an increase of $5,000.

Other expense for the six months ended June 30, 2005 was $54,000 compared to $44,000 for the same period in 2004, an increase of $10,000.

Income before income taxes for the six months ended June 30, 2005 was $7,922,000 compared to $7,391,000 for the same period in 2004, an increase of $531,000 or 7.2%. The effective income tax rate was 37.0% in 2005 and 2004.

Net income for the six months ended June 30, 2005 was $4,991,000 compared to $4,656,000 for the same period in 2004, an increase of $335,000 or 7.2%. As a percent of net sales, net income was 4.6% in 2005 and 2004. Earnings per share were $0.47 in 2005 compared to $0.44 in 2004, an increase of $0.03 per share.

PART I—CONTINUED

Liquidity and Sources of Capital

Cash provided by operating activities during the first six months in 2005 was $1,838,000, compared to $10,624,000 for the same period in 2004, a decrease of $8,786,000. The decrease was primarily attributable to an inventory build-up of $8,433,000 to support increased business activity of orders scheduled to ship in future periods.

Cash used for investing activities during the first six months in 2005 was $2,408,000, compared to $3,988,000 for the same period in 2004, a decrease of $1,580,000. Investing activities for the six months ended June 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 $726,000.

Financing activities consisted of payments for dividends, which were $2,991,155 and $2,904,808 for the six months ended June 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 4.4 to 1 at June 30, 2005 and 4.6 to 1 at June 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 Company, a wholly-owned subsidiary, which resulted in an untimely recognition of a decrease in inventory and net income at Patterson Pump Company.

Progress has continued 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 including additional staffing of inventory control personnel that will assist in the remediation process.

PART I—CONTINUED

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 June 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.

****************************

PART II—OTHER INFORMATION

(a)

Exhibits

	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: August 2, 2005