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

The Gorman-Rupp Company 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 March 31, 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 12-b-2 of the Exchange Act). Yes þ No o

Common shares, without par value, outstanding at March 31, 2005. 10,682,697

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Page 1 of 18 pages

 


 

The Gorman-Rupp Company and Subsidiaries
Three Months Ended March 31, 2005 and 2004

PART I. FINANCIAL INFORMATION

         
 
  Item 1.   Financial Statements (Unaudited)
 
       
 
      Condensed Consolidated Statements of Income
 
           -Three months ended March 31, 2005 and 2004
 
       
 
      Condensed Consolidated Balance Sheets
 
           -March 31, 2005 and December 31, 2004
 
       
 
      Condensed Consolidated Statements of Cash Flows
 
           -Three months ended March 31, 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 CEO Certification
 
   
 
  EX-31.2 302 CFO Certification
 
   
 
  EX-32 Section 1350 CEO and CFO Certifications

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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  
    March 31,  
(Thousands of dollars, except per share amounts)   2005     2004  
Net sales
  $ 52,037     $ 49,431  
Cost of products sold
    42,252       39,335  
 
           
Gross Profit
    9,785       10,096  
 
               
Selling, general and administrative expenses
    7,431       6,864  
 
           
Operating Income
    2,354       3,232  
 
               
Other income
    317       290  
 
               
Other expense
    (47 )     (19 )
 
           
Income Before Income Taxes
    2,624       3,503  
 
               
Income taxes
    970       1,296  
 
           
Net Income
  $ 1,654     $ 2,207  
 
           
Basic And Diluted
               
Earnings Per Share
  $ 0.15     $ 0.21  
 
               
Dividends Paid Per Share
  $ 0.140     $ 0.136  
 
               
Average Shares Outstanding
    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.

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

                 
             
    March 31,     December 31,  
(Thousands of dollars)   2005     2004  
Assets
               
 
               
Current Assets:
               
 
               
Cash and cash equivalents
  $ 15,040     $ 16,202  
Short-term investments
    2,672       2,696  
Accounts receivable - net
    32,145       32,988  
Inventories - net
    42,875       38,234  
Other current assets and deferred income taxes
    6,101       6,525  
 
           
Total Current Assets
    98,833       96,645  
 
               
Property, plant and equipment
    133,587       135,660  
less allowances for depreciation
    80,486       80,848  
 
           
Property, Plant and Equipment - Net
    53,101       54,812  
 
               
Other assets
    14,932       13,887  
 
           
Total Assets
  $ 166,866     $ 165,344  
 
           
 
               
Liabilities and Shareholders’ Equity
               
 
               
Current Liabilities:
               
 
               
Accounts payable
  $ 7,057     $ 6,615  
Payrolls and related liabilities
    3,732       3,412  
Accrued expenses
    10,339       10,514  
Income taxes
    1,209       571  
 
           
Total Current Liabilities
    22,337       21,112  
 
               
Postretirement benefits
    22,641       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
    117,420       117,261  
Accumulated other comprehensive loss
    (625 )     (456 )
 
           
Total Shareholders’ Equity
    121,888       121,898  
 
           
Total Liabilities and Shareholders’ Equity
  $ 166,866     $ 165,344  
 
           

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

See notes to condensed consolidated financial statements.

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

                 
    Three Months Ended  
    March 31,  
(Thousands of dollars)   2005     2004  
Cash Flows From Operating Activities:
               
 
               
Net income
  $ 1,654     $ 2,207  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,737       1,790  
Changes in operating assets and liabilities
    (1,850 )     587  
 
           
Net Cash Provided by Operating Activities
    1,541       4,584  
 
               
Cash Flows From Investing Activities:
               
 
               
Capital disposals (additions), net
    134       (970 )
Change in short-term investments
    24       (368 )
Payment for acquisition
    (1,331 )      
 
           
Net Cash Used for Investing Activities
    (1,173 )     (1,338 )
 
               
Cash Flows From Financing Activities:
               
 
               
Cash dividends
    (1,495 )     (1,452 )
 
           
Net Cash Used for Financing Activities
    (1,495 )     (1,452 )
 
               
Effect of exchange rate changes on cash
    (35 )     (33 )
 
           
Net (Decrease) Increase in Cash and Cash Equivalents
    (1,162 )     1,761  
 
               
Cash and Cash Equivalents:
               
Beginning of year
    16,202       16,272  
 
           
March 31,
  $ 15,040     $ 18,033  
 
           

See notes to condensed consolidated financial statements.

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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 month periods ended March 31, 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 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.

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PART I—CONTINUED

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

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:

                 
    March 31,     December 31,  
(Thousands of dollars)   2005     2004  
Raw materials and in-process
  $ 22,724     $ 20,348  
Finished parts
    18,436       16,602  
Finished products
    1,715       1,284  
 
           
 
  $ 42,875     $ 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:

                 
    Three Months Ended  
    March 31,  
(Thousands of dollars)   2005     2004  
Balance at beginning of year
  $ 829     $ 599  
Warranty costs
    269       325  
Settlements
    (297 )     (151 )
 
           
Balance at end of quarter
  $ 801     $ 773  
 
           

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

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PART I—CONTINUED

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

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 March 31, 2005 and 2004, total comprehensive income was $1,485,000 and $1,962,000, 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  
 
    Three Months Ended     Three Months Ended  
    March 31,     March 31,  
(Thousands of dollars)   2005     2004     2005     2004  
 
Service cost
  $ 485     $ 468     $ 262     $ 262  
Interest cost
    554       535       444       431  
Expected return on plan assets
    (609 )     (559 )            
 
                               
Amortization of prior service cost and unrecognized (gain)/loss
    169       136             (185 )
 
                               
Recognized net actuarial (gain)/loss
                74       50  
 
                               
 
                       
Benefit cost
  $ 599     $ 580     $ 780     $ 558  
 
                       

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

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PART I—CONTINUED

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

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.

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.

First Quarter 2005 Compared to First Quarter 2004

Net sales for the first quarter 2005 were $52,037,000 compared to $49,431,000 for the same period 2004, an increase of $2,606,000 or 5.3%. The increase in net sales for the first quarter of 2005 resulted primarily from higher product sales in the construction, industrial and international markets. The backlog of orders at March 31, 2005 was $88,958,000 compared to $56,444,000 at March 31, 2004, an increase of $32,514,000 or 57.6% principally due to increased business in the construction, international and fire protection markets. The increase in net sales and backlog reflects a continuation

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PART I—CONTINUED

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

of positive signs in the economy, expansion of the capital goods markets and increased global demand for pumps principally driven by the higher price of oil.

Cost of products sold for the first quarter 2005 was $42,252,000 compared to $39,335,000 during 2004, an increase of $2,917,000 or 7.4%, primarily due to higher sales volume. As a percentage of net sales, cost of products sold was 81.2% in 2005, compared to 79.6% in 2004. The change in percent of net sales in the first quarter 2005 was primarily attributable to higher material costs from suppliers, lower margins in price sensitive markets and start-up costs associated with the new heating, ventilating and air conditioning (HVAC) market.

Selling, general, and administrative (“SG&A”) expenses were $7,431,000 in the first quarter 2005 compared to $6,864,000 in 2004, an increase of $567,000 or 8.3%. As a percentage of net sales, SG&A expenses were 14.3% in 2005 compared to 13.9% in 2004. Increases in SG&A expenses principally resulted from higher professional service fees of $305,000 related to compliance requirements of the Sarbanes-Oxley Act of 2002 and higher marketing cost of $260,000 related to product promotion at a CONEXPO show held every three years.

Other income in the current quarter 2005 was $317,000 compared to $290,000 for the same period in 2004, an increase of $27,000.

Other expense in the current quarter 2005 was $47,000 compared to $19,000 for the same period in 2004, an increase of $28,000.

Income before income taxes for the first quarter 2005 was $2,624,000 compared to $3,503,000 for the same period in 2004, a decrease of $879,000 or 25.1%. The effective income tax rate was 37.0% in 2005 and 2004.

Net income for the first quarter 2005 was $1,654,000 compared to $2,207,000 for the same period in 2004, a decrease of $553,000 or 25.1%. As a percent of net sales, net income was 3.2% in 2005 compared to 4.5% in 2004. Earnings per share was $0.15 in 2005 compared to $0.21 in 2004, a decrease of $0.06 per share.

Liquidity and Sources of Capital

Cash provided by operating activities during the first three months in 2005 was $1,541,000, compared to $4,584,000 for the same period in 2004, a decrease of $3,043,000. The decrease was primarily attributable to unfavorable variances in inventory and commissions payable of $7,800,000 and $918,000, respectively. These variances are principally due to inventory build-up to support the increased business activity and decreased sales that generate commissions. The decrease in cash provided by operating activities was partially offset by a favorable variance in accounts receivable of $5,100,000 which reflects timing of collections.

Cash used for investing activities during the first three months in 2005 was $1,173,000, compared to $1,338,000 for the same period in 2004, a decrease of $165,000. Investing activities for the three months ended March 31, 2005 primarily consisted of a payment for the acquisition of a submersible pump line of $1,331,000, partially offset by a net gain on asset disposals of $134,000. The Company

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PART I—CONTINUED

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

also increased its short-term investments by $1,130,000 during the trailing twelve months ended March 31, 2005.

Financing activities consisted of payments for dividends, which were $1,495,000, and $1,452,000 for the three months ended March 31, 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 March 31, 2005 and 4.6 to 1 at March 31, 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 additional staff and is currently recruiting for a senior level position. Also, improved lines of reporting to corporate accounting have been incorporated throughout the Company.

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

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PART I—CONTINUED

ITEM 4. CONTROLS AND PROCEDURES—CONTINUED

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 March 31, 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
         
  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: May 4, 2005
       
         
     
  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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