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 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

 

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.

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.

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

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.

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:

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.

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.

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:

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

Date: August 2, 2005