UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the Quarterly Period Ended March 31, 2014
OR
For the transition period from to
Commission File Number 1-6747
The Gorman-Rupp Company
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 26,253,043 shares of common stock, without par value, outstanding at April 23, 2014.
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Page 1 of 21 Pages
The Gorman-Rupp Company and Subsidiaries
Three Months Ended March 31, 2014 and 2013
PART I. FINANCIAL INFORMATION
Item 1.
-Three Months Ended March 31, 2014 and 2013
-March 31, 2014 and December 31, 2013
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1A.
Item 6.
EX-31.1
EX-31.2
EX-32
EX-101
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ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)
THE GORMAN-RUPP COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Net sales
Cost of products sold
Gross profit
Selling, general and administrative expenses
Operating income
Other income
Other expense
Income before income taxes
Income taxes
Net income
Earnings per share
Cash dividends paid per share
Average shares outstanding
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Cumulative translation adjustments
Pension and postretirement medical liability adjustments, net of tax
Other comprehensive (loss) income
Total comprehensive income
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable - net
Inventories - net
Deferred income taxes and other current assets
Total current assets
Property, plant and equipment
Less accumulated depreciation
Property, plant and equipment - net
Other assets
Goodwill and other intangible assets - net
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Short-term debt
Payroll and related liabilities
Commissions payable
Deferred revenue
Accrued expenses
Total current liabilities
Postretirement benefits
Deferred and other income taxes
Total liabilities
Shareholders’ equity
Common shares, without par value:
Authorized - 35,000,000 shares
Outstanding - 26,253,043 shares in 2014 and in 2013 (after deducting treasury shares of 795,753 in 2014 and in 2013) at stated capital amount
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flows from operating activities:
Adjustments to reconcile net income attributable to net cash (used) provided by operating activities:
Depreciation and amortization
Pension expense, including 2013 non-cash settlement loss
Contributions to pension plan
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other
Net cash (used) provided by operating activities
Cash flows from investing activities:
Capital additions
Change in short-term investments
Net cash used for investing activities
Cash flows from financing activities:
Cash dividends
Payments to bank for borrowings
Net cash used for financing activities
Effect of exchange rate changes on cash
Net decrease in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
March 31,
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PART I
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 (“GAAP”) 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 GAAP for complete financial statements. The consolidated financial statements include the accounts of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of results that may be expected for the year ending December 31, 2014. 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, 2013, from which related information herein has been derived.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost or market. The costs for approximately 74% of inventories at March 31, 2014 and 76% of inventories at December 31, 2013 are determined using the last-in, first-out (LIFO) method, with the remainder determined using the first-in, first-out (FIFO) method applied on a consistent basis. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.
The major components of inventories are as follows (net of LIFO reserves of $56.4 million and $55.3 million at March 31, 2014 and December 31, 2013, respectively):
(Thousands of dollars)
Raw materials and in-process
Finished parts
Finished products
Total inventories
NOTE C - PRODUCT WARRANTIES
A liability is established for estimated future warranty and service claims based on historical claims 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:
Balance at beginning of year
Provision
Claims
Balance at end of period
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PART I – CONTINUED
NOTE D - PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors a defined benefit pension plan (“Plan”) covering certain domestic employees. Benefits are based on each covered employee’s years of service and compensation. The Plan is funded in conformity with the funding requirements of applicable U.S. regulations. The Plan was closed to new participants effective January 1, 2008. Employees hired after this date, in eligible locations, participate in an enhanced 401(k) plan instead of the defined benefit pension plan. Employees hired prior to this date continue to accrue benefits.
Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees.
The Company also sponsors a non-contributory defined benefit health care plan that provides health benefits to certain domestic and Canadian retirees and their spouses. The Company funds the cost of these benefits as incurred.
The following tables present the components of net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Recognized actuarial loss (gain)
Settlement loss
Net periodic benefit cost
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NOTE E – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes reclassifications out of accumulated other comprehensive income (loss):
Pension and other postretirement benefits:
Recognized actuarial loss (a)
Settlement loss (b)
Settlement loss (c)
Total before income tax
Income tax
Net of income tax
The following tables summarize changes in accumulated balances for each component of other comprehensive income (loss):
Balance at January 1, 2014
Current period credit (charge)
Income tax expense
Balance at March 31, 2014
Balance at January 1, 2013
Balance at March 31, 2013
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Executive Overview and Outlook
Net sales during the first quarter of 2014 increased 19.0% to a record $110.1 million compared to $92.5 million during the same period in 2013. Domestic sales increased 28.0% or $15.7 million and international sales increased 5.3% or $1.9 million. Sales in our water end markets increased $12.0 million and sales in non-water end markets increased $5.6 million during the first quarter.
The increase in water end market sales was due about equally to increases in shipments of $4.1 million in the construction market principally for pumps for rental businesses and for oil and gas drilling and fracking within North America, $4.1 million in the fire market due to increased domestic commercial construction spending, and $4.3 million in the municipal market driven by large volume pumps related to wastewater and water supply. Sales increased $4.8 million in the non-water markets primarily due to increased shipments for the OEM market related to power generation equipment and pumps for military applications.
Gross profit was a record $27.6 million for the first quarter of 2014, resulting in gross margin of 25.0% compared to 23.0% in the same period in 2013. The increase in gross margin was principally due to increased sales and sales mix changes during the quarter. Operating income was $14.7 million, resulting in operating margin of 13.3% in the first quarter of 2014 compared to 8.9% in the same period in 2013. The gross margin and operating margin for the first quarter of 2013 were reduced by 90 and 150 basis points, respectively, due to a non-cash pension settlement charge which did not recur in the first quarter of 2014.
Net income was $10.0 million during the first quarter of 2014 compared to $5.8 million in the first quarter of 2013 and earnings per share were $0.38 and $0.22 for the respective periods. Earnings per share for the first quarter of 2013 were reduced by $0.04 due to the pension settlement charge noted above.
The Company’s backlog of orders was $171.7 million at March 31, 2014 compared to $182.2 million at December 31, 2013. Incoming orders grew 19% during the current quarter compared to the previous quarter primarily reflecting increased activity across our water end markets. The $10.5 million decrease in backlog is principally due to record shipments during the current quarter. Approximately $56.1 million of the PCCP project to supply major flood control pumps to a member of a joint venture construction group for a significant New Orleans flood control project remain in the March 31, 2014 backlog total. The pumps for this project are expected to be shipped primarily in the second half of 2014 and first half of 2015.
Cash and short-term investments totaled $22.0 million and short-term bank debt was $5.2 million at March 31, 2014. Working capital rose 5.4% from December 31, 2013 to a record $135.5 million at March 31, 2014 principally due to increased first quarter 2014 net sales. Net capital expenditures for 2014, consisting principally of machinery and equipment and building improvements, are estimated to be in the range of $12 to $14 million and are expected to be financed through internally generated funds.
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At its April 24, 2014 meeting, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per share on the common stock of the Company, payable June 10, 2014, to shareholders of record May 15, 2014. This marks the 257th consecutive dividend paid by The Gorman-Rupp Company.
We believe that the Company is well positioned to grow organically at generally comparable operating margins over the long term by expanding our customer base both domestically and globally, and through new product offerings. We expect that the increasing need for water and wastewater infrastructure rehabilitation within the United States, and similar needs internationally, along with increasing demand for high quality pumps and pump systems for industrial and agricultural applications, will provide excellent growth opportunities for Gorman-Rupp in the future.
First Quarter 2014 Compared to First Quarter 2013
Net Sales
Sales increased $12.0 million in our water end markets due to increased construction market demand of $4.1 million principally for pumps for rental businesses and for oil and gas drilling and fracking within North America. In addition, sales increased in the fire market of $4.1 million due to commercial construction spending and in the municipal market of $4.3 million driven by large volume pumps related to wastewater and water supply.
Sales increased $4.8 million in the non-water markets primarily due to increased shipments for the OEM market related to power generation equipment and pumps for military applications.
Cost of Products Sold and Gross Profit
% of Net sales
Gross margin
The increase in gross margin was principally due to increased sales and sales mix changes during the quarter. The gross margin for the first quarter of 2013 was reduced by 90 basis points due to a pension settlement charge which did not recur in the first quarter of 2014.
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PART I - CONTINUED
Selling, General and Administrative Expenses (SG&A)
Selling, general and administrative expenses (SG&A)
The decrease in SG&A expenses as a percent of net sales is principally due to increased sales during the quarter. SG&A expenses for the first quarter of 2013 as a percent of net sales included 60 basis points due to a pension settlement charge which did not recur in the first quarter of 2014 and costs related to two acquisitions made in the fourth quarter of 2012.
Net Income
Effective tax rate
The increase in net income was primarily due to increased sales during the current quarter of $17.6 million, and a pension settlement charge, net of income taxes, of $922,000 in the first quarter of 2013 which did not recur in the first quarter of 2014. The difference in the effective tax rate between the two periods is primarily due to the federal research and development tax credit which was reinstated and extended in January 2013 from January 1, 2012 to December 31, 2013, and was not permitted to be recorded in 2012 under applicable accounting rules based on the date of the reinstatement’s enactment.
Liquidity and Capital Resources
Net cash (used by) provided by operating activities
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Cash and cash equivalents and short-term investments totaled $22.0 million, and there was $5.2 million in outstanding bank debt at March 31, 2014. In addition, the Company had $26.1 million available in bank lines of credit after deducting $3.9 million in outstanding letters of credit primarily related to customer orders. The Company was in compliance with its nominal restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at March 31, 2014.
Working capital increased 5.4% from December 31, 2013 to a record $135.5 million at March 31, 2014 principally due to record first quarter 2014 net sales and debt reduction during the quarter.
The primary driver of operating cash flows during the first quarter of 2014 was increased accounts receivable due to record sales during the period. During this same period in 2013 operating cash flows were primarily driven by a reduction in the use of cash required to fund inventory and decreased accounts receivable.
During the first quarter of 2014, investing activities of $1.6 million primarily consisted of capital expenditures for machinery and equipment. Net capital expenditures for 2014, consisting principally of machinery and equipment and building improvements, are estimated to be in the range of $12 to $14 million and are expected to be principally financed through internally generated funds. During the first quarter of 2013, investing activities of $2.3 million consisted primarily of capital expenditures for machinery and equipment.
Net cash used for financing activities for the first quarter of 2014 consisted of dividend payments of $2.7 million and re-payment of $3.8 million in short-term debt. The ratio of current assets to current liabilities was 3.4 to 1 at March 31, 2014 and 3.1 to 1 at December 31, 2013.
On April 24, 2014, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per share on the common stock of the Company, payable June 10, 2014, to shareholders of record May 15, 2014. This marks the 257th consecutive dividend paid by The Gorman-Rupp Company.
The Company currently expects to continue its distinguished history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.
Critical Accounting Policies
Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 2013 contained in our Fiscal 2013 Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
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Safe Harbor Statement
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: This Quarterly Report on Form 10-Q contains various forward-looking statements based on assumptions concerning The Gorman-Rupp Company’s operations, future results and prospects. These forward-looking statements are based on current expectations about important economic, political, and technological factors, among others, and are subject to risks and uncertainties, 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, but are not limited to: (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 regulations, including taxes; (5) stable governments and business conditions in emerging economies; (6) successful penetration of emerging economies; (7) unforeseen delays or disruptions in the New Orleans flood control project; and (8) continuation of the favorable environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.
The Company’s foreign operations do not involve material risks due to their relative size, both individually and collectively. Approximately 90% of the Company’s sales are domiciled within or originated from the United States. The Company is not exposed to material market risks as a result of its diversified export sales. Export sales generally are denominated in U.S. Dollars and made on open account or under letters of credit.
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. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act of 1934 is accumulated and communicated to the Company’s Management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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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 were effective as of March 31, 2014.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2014, the Company implemented the enterprise performance management system of Tagetik at all of our locations, including Corporate. The Company believes that effective internal control over financial reporting was maintained during and after this conversion. There have been 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.
PART II OTHER INFORMATION
There are no material changes from the legal proceedings previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
There are no material changes from the risk factors previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
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* In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.
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.
/s/ Wayne L. Knabel
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