Gorman-Rupp - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

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 Noo

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.

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

Common shares, without par value, outstanding at March 31, 2006 10,685,697

 

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 months ended March 31, 2006 are not necessarily indicative of results that may be expected for the year ending December 31, 2006. 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, 2005.

In November 2004, the FASB issued 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. The Company adopted SFAS No. 151 effective January 1, 2006.

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 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:

During the three-month period ended March 31, 2006 and 2005, total comprehensive income was $4,214,000 and $1,485,000, respectively. The reconciling item between net income and comprehensive income consists of foreign currency translation adjustments.

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, 2005 included in the Form 10-K.)

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.

Net sales for the first quarter 2006 were $67,087,000 compared to $52,037,000 for the same period 2005, an increase of $15,050,000 or 28.9%. Strength in the fire protection, municipal and international markets contributed to the increase. At Patterson Pump Company, a wholly-owned subsidiary, fire protection sales increased $7,200,000 and fabricated components sales to the power generation market increased $3,300,000 over first quarter 2005 levels.

The record backlog of orders at March 31, 2006 was $98,600,000 compared to $89,000,000 at March 31, 2005. The backlog is up slightly from the previous record backlog of $94,100,000 at December 31, 2005. Patterson Pump orders for fabricated components increased $9,600,000 for the quarter compared to the first quarter of 2005. The backlog at Patterson Pump continued to be strong and totaled $67,600,000 at March 31, 2006.

Cost of products sold for the first quarter 2006 was $52,137,000 compared to $42,252,000 during 2005, an increase of $9,885,000 or 23.4%, primarily due to the higher sales volume. As a percentage of net sales, cost of products sold was 77.8% in 2006, compared to 81.2% in 2005. The reduction in cost of products sold as a percent of net sales was primarily related to increased efficiencies of the Company’s production facilities due to additional volume. Material costs and hourly labor costs increased $7,678,000 and $1,340,000, respectively, to support the higher production levels. Expenses related to the Company’s employee profit sharing plan increased $502,000 as a result of higher operating income. Warranty costs increased $188,000 due to estimates related to the higher sales volume and utility costs increased $137,000 primarily due to higher energy costs.

Selling, general, and administrative (“SG&A”) expenses were $8,106,000 in the first quarter 2006 compared to $7,431,000 in 2005, an increase of $675,000 or 9.1%. As a percentage of net sales, SG&A expenses were 12.1% in 2006 compared to 14.3% in 2005. The decrease as a percent of net sales for 2006 was primarily due to additional volume. The increase in SG&A expense is primarily due to expenses related to the Company’s employee profit sharing plan of $335,000 as a result of higher operating income, business tax of $211,000 and professional services of $246,000 related to higher auditing and consulting services. Partially offsetting this increase was a $230,000 reduction in advertising expense compared to 2005 when a large trade show was held, which will be held again in 2008.

Income before income taxes for the first quarter 2006 were $7,048,000 compared to $2,624,000 for the same period in 2005, an increase of $4,424,000 or 168.6%. Income taxes for the first quarter of 2006 were $2,510,000 compared to $970,000 for the same period of 2005, and increase of $1,540,000 or 158.8%. Higher income taxes were a direct result of increased profits during the quarter. The effective income tax rate used was 35.6% in 2006 and 37.0% in 2005. The reduction in the effective tax rate is due to the favorable effects of new federal and Ohio corporate tax legislation.

Net income for the first quarter 2006 was $4,538,000 compared to $1,654,000 for the same period in 2005, an increase of $2,884,000 or 174.4%. As a percent of net sales, net income was 6.8% in 2006 compared to 3.2% in 2005. Earnings per share were $0.42 in 2006 compared to $0.15 in 2005, an increase of $0.27 per share.

Cash provided by operating activities during the first three months in 2006 was $2,478,000 compared to $1,541,000 for the same period in 2005, an increase of $937,000. The increase was primarily attributable to favorable variances in inventory, income taxes and accounts payable; partially offset by an unfavorable variance in accounts receivable resulting from increased sales in the first quarter of 2006.

Cash used for investing activities during the first three months in 2006 was $1,378,000 compared to $1,173,000 for the same period in 2005, an increase of $205,000. Investing activities for the three months ended March 31, 2006 primarily consisted of net capital additions of $781,000 and investment of $597,000 in short-term investments.

Financing activities consisted of payments for dividends, which were $1,496,000 and $1,495,000 for the three months ended March 31, 2006 and 2005, 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 3.7 to 1 at March 31, 2006 and 4.4 to 1 at March 31, 2005.

The Company presently has adequate working capital and borrowing capacity and a strong liquidity position.

The Company’s foreign operations do not involve 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.

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 March 31, 2006.

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.

There are no material changes from the legal proceedings previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

There are no material changes from the risk factors previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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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.