Gorman-Rupp - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

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 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 o   No þ

 

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. The consolidated financial statements include the accounts of the Company and it’s wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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 months ended June 30, 2008 are not necessarily indicative of results that may be expected for the year ending December 31, 2008. 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, 2007.

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 (FIN 48) January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

In September, 2006 the FASB issued FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158), which was adopted for the fiscal year ending December 31, 2006. FAS 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their consolidated financial statements.

In September, 2006 the FASB issued FAS No. 157, Fair Value Measurements (FAS 157) which provides guidance for using fair value to measure assets and liabilities. FAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. FAS 157, as originally issued, was effective for fiscal years beginning after November 15, 2007 and was adopted by the Company on January 1, 2008 with no impact on its consolidated financial position or results of operations.

In February, 2007 the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of SFAS 115, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses arising subsequent to adoption are reported in earnings. SFAS 159 is effective for the Company in fiscal 2008. The Company adopted this statement as of January 1, 2008 and elected not to apply the fair value to any of its financial instruments.

In December, 2007 the FASB issued FAS No. 141(R), Business Combinations (FAS 141(R)). FAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquired company and the goodwill acquired. This statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the impact to be material on its consolidated financial position or results of operations.

In December, 2007 the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (FAS 160) an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51). FAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. FAS 160 is effective for fiscal years beginning after December 15, 2008. The Company plans to adopt FAS 160 beginning in the first quarter of fiscal 2009. The Company does not expect the impact to be material on its consolidated financial position or results of operations.

Inventories are stated at the lower of cost or market. The costs for substantially all inventories are determined using the last-in, first-out (LIFO) method, with the remainder determined using the first-in, first-out (FIFO) method. 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.

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

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

Comprehensive income and its components, net of tax, are as follows:

The Company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5, Accounting for Contingencies. As required by Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of Interpretation 48, the Company recognized an increase of approximately $260,000 in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

The amount of unrecognized tax benefits as of January 1, 2008 was $997,000. That amount includes $794,000 of unrecognized tax benefits which, if ultimately recognized, will reduce the Company’s annual effective tax rate.

At June 30, 2008 the balance of unrecognized tax benefits had increased to approximately $1.0 million. The increase in the current quarter is related primarily to a $27,000 settlement with state taxing authorities and a $69,000 increase in prior period tax positions. The June 30, 2008 balance of unrecognized tax benefits includes $825,000 of unrecognized tax benefits which, if ultimately realized, will reduce the Company’s annual effective tax rate.

The statute of limitations in several jurisdictions will expire in the next 12 months. The Company has unrecognized tax benefits of $65,000 which would be recognized if the statute of limitations expires without the relevant taxing authority examining the applicable returns.

The effective tax rate for the six months ending June 30, 2008 was 34.1% compared to 37.1% in 2007. This decline was due to a deferred tax benefit of $170,000 recorded in 2008, and a lower effective foreign tax rate primarily due to the inclusion in 2008 of Gorman-Rupp Europe B.V. acquired in the second quarter of 2007.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2004.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company had accrued approximately $154,000 for the payment of interest and penalties at January 1, 2008. An additional accrual of interest and penalties of approximately $41,000 was recorded for the six months ended June 30, 2008.

The Company sponsors a defined benefit pension plan covering substantially all employees. Additionally, the Company sponsors a defined contribution pension plan at one location not participating in the defined benefit pension plan. A 401(k) plan that includes a partial Company match is also available. The Company also sponsors a non-contributory defined benefit health care plan that provides health benefits to substantially all retirees and their spouses. (See Note F – Pensions and Other Postretirement Benefits for the year ended December 31, 2007 included in the Form 10-K.)

For substantially all United States employees hired after January 1, 2008, an enhanced 401(k) plan is available instead of the Company’s defined benefit pension plan. Benefits are based on age and years of service. Employees hired prior to January 1, 2008 are not affected by the change.

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

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.

The increase in net sales was primarily due to increased international sales which included Gorman-Rupp Europe B.V. that was acquired in the second quarter of 2007.

Additional strength in sales was due to increased fire protection pump sales and fabricated component sales from the Company’s Patterson Pump Company subsidiary totaling $8.1 million, which more than offset the reduction of $6.8 million in custom pump revenues for a flood control project shipped in 2007. Also, increased product sales of $1.6 million in the municipal market contributed to the record quarter.

The 3.4% increase in cost of products sold in the second quarter of 2008 compared to 2007 was partially due to $623,000 of higher LIFO expense related to increased inventory levels and inflation. Manufacturing costs included increases in labor of $576,000 due to increased production levels and normal wage increases, and supplies, patterns and tooling of $398,000 due to higher sales volume. As a percent of net sales, cost of sales were 75.7% in 2008 and 77.3% in 2007, with the reduction in cost of sales as a percent of net sales due primarily to product mix and increased operating leverage on sales volume, partially offset by the addition of Gorman-Rupp Europe B.V. in the current quarter.

The 12.9% increase in SG&A expenses is partially due to increased advertising costs of $297,000 related to the Construction Expo trade show and the International Trade Fair for Water – Sewage – Refuse – Recycling, both of which are held every three years. Salaries and payroll taxes increased $280,000 principally as a result of normal compensation increases and profit sharing expense based on increased operating income rose by $224,000.

The 48.2% increase in other income is principally due to the final accounting for insurance proceeds related to property damage caused by flooding of a facility at the Company’s Mansfield Division in August 2007.

The decline in the effective tax rate to 33.8% in 2008 from 37.4% in 2007 was primarily due to a lower effective foreign tax rate as a result of the inclusion in 2008 of Gorman-Rupp Europe B.V. that was acquired in the second quarter of 2007.

Earnings per share reflect the five-for-four stock split distributed December 10, 2007.

The record sales for the six months were principally due to increased international sales of $8.0 million, which included Gorman-Rupp Europe B.V. acquired in the second quarter of 2007. Additional strength in sales was due to increased fire protection pump sales and increased fabricated component sales from the Company’s Patterson Pump Company subsidiary totaling $11.8 million, which more than replaced the $11.1 million in custom pump revenues for a flood control project shipped in 2007.

The backlog at June 30, 2008 was $119.6 million compared to $98.0 million at June 30, 2007, representing a 22% increase primarily due to orders in the fire protection and original equipment markets.

The increase in cost of products sold was primarily due to higher sales volume, which resulted in increased material costs of $3.1 million. Manufacturing costs increased $2.2 million primarily due to the addition of Gorman-Rupp Europe B.V. purchased in the second quarter of 2007, and supplies, patterns and tooling due to higher sales volume. Partially offsetting these increases are reduced healthcare costs of $567,000 due to reduced claims experience and a subrogation settlement of $300,000 received from a third-party carrier. The reduction in cost of sales as a percent of net sales was due primarily to product mix, increased operating leverage on added sales volume and the inclusion of Gorman-Rupp Europe B.V.

The increase in SG&A expenses is principally due to increases in advertising costs of $506,000 and travel and supplies of $269,000 related to the Construction Expo trade show held every three years. Also, profit sharing based on increased operating income rose by $477,000, and salaries and payroll taxes increased $476,000 primarily as a result of normal compensation increases.

The increase in other income is primarily due to the final accounting for insurance proceeds related to property damage caused by flooding of a facility at the Company’s Mansfield Division in August 2007.

The decline in the effective tax rate was due to a deferred tax benefit of $170,000 recorded in 2008, and a lower effective foreign tax rate due to the inclusion in 2008 of Gorman-Rupp Europe B.V. acquired in the second quarter of 2007.

Earnings per share reflect the five-for-four stock split distributed December 10, 2007.

The decrease in cash provided by operating activities is principally due to reducing accounts payable by $7.6 million and reducing prepaid income taxes by $4.3 million for the six months ended June 30, 2008 compared to the same period last year; these amounts were partially offset by reduced accounts receivable of $6.8 million.

Investing activities for the six months ended June 30, 2008 primarily consisted of capital expenditures related to the consolidation and expansion of the Mansfield, Ohio facilities of $2.7 million and machinery and equipment additions of $2.9 million. Total capital expenditures of $5.0 million have been incurred as of June 30, 2008 related to the consolidation and expansion of the Mansfield, Ohio facilities.

Financing activities consisted of payments for dividends, which were $3.3 million and $3.2 million for the six months ended June 30, 2008 and 2007, respectively.

The Company continues to finance its capital expenditures and working capital requirements principally through internally generated funds, available unsecured lines of credit and proceeds from short-term investments. The ratio of current assets to current liabilities was 4.4 to 1 at June 30, 2008 and 3.6 to 1 at June 30, 2007.

The Company’s foreign operations do not involve material risks due to their relative 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.

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, 2008.

There were no 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.

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, 2007.

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, 2007.

The annual meeting of the shareholders of the Company was held on April 24, 2008. At this meeting the shareholders approved the following management proposals:

Exhibits 3 and 4 (articles of incorporation) are incorporated herein by this reference from Exhibits (3) and (4) of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

Exhibits 3, 4 and 10 (by-laws; instruments defining the rights of security holders, including indentures; and material contracts) are incorporated herein by this reference from Exhibits (3), (4) and (10) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

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.

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.