FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

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.)

 

600 South Airport Road, 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  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.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Common shares, without par value, outstanding at October 26, 2012. 20,996,893

 

 

 


Table of Contents

The Gorman-Rupp Company and Subsidiaries

Nine Months Ended September 30, 2012 and 2011

 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

     3   

Condensed Consolidated Statements of Income—Three Months Ended September  30, 2012 and 2011—Nine Months Ended September 30, 2012 and 2011

     3   

Condensed Consolidated Statements of Comprehensive Income—Three Months Ended September  30, 2012 and
2011—Nine Months Ended September 30, 2012 and 2011

     4   

Condensed Consolidated Balance Sheets—September 30, 2012 and December 31, 2011

     5   

Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2012 and 2011

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     9   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     16   

Item 4. Controls and Procedures

     16   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     16   

Item 1A. Risk Factors

     16   

Item 6. Exhibits

     17   

EX-31.1 Section 302 Principal Executive Officer (PEO) Certification

  

EX-31.2 Section 302 Principal Financial Officer (PFO) Certification

  

EX-32 Section 1350 Certifications

  

EX-101 Financial statements from the Quarterly Report on Form 10-Q of The Gorman-Rupp Company for the quarter ended September 30, 2012, formatted in eXtensible Business Reporting Language (XBRL)

  

 

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(Dollars in thousands, except per share amounts)    2012     2011     2012     2011  

Net sales

   $ 91,626      $ 90,215      $ 287,034      $ 266,448   

Cost of products sold

     69,796        67,748        215,789        198,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     21,830        22,467        71,245        68,102   

Selling, general and administrative expenses

     11,727        10,941        34,420        32,436   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     10,103        11,526        36,825        35,666   

Other income

     161        78        665        299   

Other expense

     (123     (402     (380     (720
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     10,141        11,202        37,110        35,245   

Income taxes

     3,435        3,547        12,595        11,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,706      $ 7,655      $ 24,515      $ 23,699   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

   $ 0.32      $ 0.37      $ 1.17      $ 1.13   

Cash dividends paid per share

   $ 0.100      $ 0.090      $ 0.290      $ 0.264   

Average shares outstanding

     20,996,828        20,989,882        20,992,886        20,986,574   

 

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Table of Contents

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(Thousands of dollars)    2012      2011     2012      2011  

Net income

   $ 6,706       $ 7,655      $ 24,515       $ 23,699   

Cumulative translation adjustments

     726         (2,172     489         (887

Pension and postretirement medical liability adjustments, net of tax

     453         403        1,351         978   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total adjustments

     1,179         (1,769     1,840         91   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 7,885       $ 5,886      $ 26,355       $ 23,790   
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

     September 30,     December 31,  
(Thousands of dollars)    2012     2011  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 14,780      $ 20,142   

Short-term investments

     253        1,060   

Accounts receivable—net

     60,298        56,419   

Inventories—net

     81,790        73,193   

Deferred income taxes and other current assets

     5,518        5,058   
  

 

 

   

 

 

 

Total current assets

     162,639        155,872   

Property, plant and equipment

     238,562        226,408   

Less accumulated depreciation

     117,903        112,059   
  

 

 

   

 

 

 

Property, plant and equipment—net

     120,659        114,349   

Other assets

     4,037        2,998   

Goodwill and other intangible assets—net

     27,247        25,481   
  

 

 

   

 

 

 

Total assets

   $ 314,582      $ 298,700   
  

 

 

   

 

 

 
Liabilities and shareholders’ equity     

Current liabilities:

    

Accounts payable

   $ 11,427      $ 15,679   

Short-term debt

     8,000        10,000   

Payroll and related liabilities

     12,078        10,283   

Commissions payable

     5,673        7,757   

Accrued expenses

     11,796        7,154   
  

 

 

   

 

 

 

Total current liabilities

     48,974        50,873   

Pension benefits

     3,421        6,571   

Postretirement benefits

     23,259        22,705   

Deferred and other income taxes

     3,719        3,787   
  

 

 

   

 

 

 

Total liabilities

     79,373        83,936   

Shareholders’ equity

    

Common shares, without par value:

    

Authorized—35,000,000 shares

    

Outstanding—20,996,893 shares in 2012 and 20,990,893 in 2011 (after deducting treasury shares of 642,603 in 2012 and 648,603 in 2011) at stated capital amount

     5,130        5,128   

Additional paid-in capital

     2,693        2,544   

Retained earnings

     241,590        223,136   

Accumulated other comprehensive loss

     (14,204     (16,044
  

 

 

   

 

 

 

Total shareholders’ equity

     235,209        214,764   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 314,582      $ 298,700   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

THE GORMAN-RUPP COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Nine Months Ended  
     September 30,  
(Thousands of dollars)    2012     2011  

Cash flows from operating activities:

    

Net income

   $ 24,515      $ 23,699   

Adjustments to reconcile net income attributable to net cash provided by operating activities:

    

Depreciation and amortization

     8,927        8,516   

Pension expense

     3,011        2,434   

Contributions to pension plan

     (4,200     (4,200

Changes in operating assets and liabilities:

    

Accounts receivable

     (2,062     (2,845

Inventories

     (7,118     (20,554

Accounts payable

     (4,492     4,278   

Commissions payable

     (2,084     (161

Other

     4,168        7,138   
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,665        18,305   

Cash flows from investing activities:

    

Capital additions

     (14,165     (8,547

Acquisition net of cash acquired

     (4,812     —     

Change in short-term investments

     806        572   
  

 

 

   

 

 

 

Net cash used for investing activities

     (18,171     (7,975

Cash flows from financing activities:

    

Cash dividends

     (6,088     (5,541

Payments to bank for borrowings

     (2,000     (10,000

Other

     —          (27
  

 

 

   

 

 

 

Net cash used for financing activities

     (8,088     (15,568

Effect of exchange rate changes on cash

     232        (662
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (5,362     (5,900

Cash and cash equivalents:

    

Beginning of year

     20,142        32,229   
  

 

 

   

 

 

 

September 30,

   $ 14,780      $ 26,329   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

PART I

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 (“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 Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of results that may be expected for the year ending December 31, 2012. 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, 2011, 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 79% of inventories at September 30, 2012 and 82% at December 31, 2011 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 and are subject to the final year-end LIFO inventory valuation.

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

 

(Thousands of dollars)

   September 30,
2012
     December 31,
2011
 

Raw materials and in-process

   $ 23,363       $ 30,480   

Finished parts

     45,046         36,451   

Finished products

     13,381         6,262   
  

 

 

    

 

 

 

Total inventories

   $ 81,790       $ 73,193   
  

 

 

    

 

 

 

NOTE C—PRODUCT WARRANTIES

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:

 

      September 30,  

(Thousands of dollars)

   2012     2011  

Balance at beginning of year

   $ 1,228      $ 1,543   

Provision

     1,059        848   

Claims

     (1,117     (1,034
  

 

 

   

 

 

 

Balance at end of period

   $ 1,170      $ 1,357   
  

 

 

   

 

 

 

 

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Table of Contents

PART I – CONTINUED

 

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

NOTE D—PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company sponsors a defined benefit pension plan covering several locations.

A 401(k) plan that includes a partial Company match is also available. For the locations covered by the defined benefit pension plan, employees hired after January 1, 2008 participate in an enhanced 401(k) plan instead of the defined benefit pension plan. Benefits are based on the employee’s age and years of service with the Company. Employees hired prior to January 1, 2008 were not affected by the change to the 401(k) plan.

Additionally, the Company sponsors defined contribution pension plans at two subsidiaries, American Machine and Tool Co., Inc. of Pennsylvania and National Pump Company, not participating in the defined benefit pension plan.

The Company also sponsors a non-contributory defined benefit health care plan that provides certain health benefits to a majority of 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:

 

     Pension Benefits     Postretirement Benefits  
      Three Months Ended
September 30,
    Three Months Ended
September 30,
 

(Thousands of dollars)

   2012     2011     2012     2011  

Service cost

   $ 797      $ 714      $ 288      $ 263   

Interest cost

     700        767        218        277   

Expected return on plan assets

     (1,148     (1,127     —          —     

Recognized actuarial loss (gain)

     611        418        (161     (164
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 960      $ 772      $ 345      $  376   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Pension Benefits     Postretirement Benefits  
      Nine Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Thousands of dollars)

   2012     2011     2012     2011  

Service cost

   $ 2,391      $ 2,142      $ 866      $ 789   

Interest cost

     2,102        2,301        653        831   

Expected return on plan assets

     (3,443     (3,383     —          —     

Recognized actuarial loss (gain)

     1,831        1,256        (485     (492
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 2,881      $ 2,316      $ 1,034      $  1,128   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE E—ACQUISITION

On September 1, 2012, the Company’s wholly-owned subsidiary, Gorman-Rupp Africa Proprietary Limited (“G-R Africa”), purchased the business of Pumptron (Proprietary) Limited (“Pumptron”) through internally generated cash flows. The allocation of the purchase price to the business acquired is preliminary and will be finalized pending completion of a fair value appraisal process.

 

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Table of Contents

PART I – CONTINUED

 

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

Pumptron has been an international value-added distributor for Gorman-Rupp for over 25 years and will further enhance the Company’s continuing international expansion. Founded in 1986, Pumptron is a leading provider of water-related pumping solutions primarily serving the construction, mining, agricultural and municipal markets in South Africa and increasingly throughout other sub-Sahara African countries. Pumptron is headquartered in Johannesburg with operating locations in Cape Town and Durban, all in South Africa, and had approximately $10 million in revenue during its fiscal year 2012, which included sales of Gorman-Rupp products.

 

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

Executive Overview and Outlook

The Gorman-Rupp Company is a leading designer, manufacturer and international marketer of pumps and related equipment (pump and motor controls) for use in diverse water, wastewater, construction, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications. The Company attributes its success to long-term product quality, applications and performance combined with delivery and service, and continually develops initiatives to improve performance in these key areas.

Gorman-Rupp actively pursues growth opportunities through organic growth, international business opportunities and acquisitions. We continually invest in training for our employees, new product development and modern manufacturing equipment and technology designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. The Company also is currently focused on incorporating significantly changing engine designs related to new emission standards mandated by the U.S. Environmental Protection Agency (“EPA”) into our applicable products. These new governmental regulations have added, and will continue to add, additional costs to engine-driven pump products.

Net sales during the third quarter 2012 were $91.6 million compared to $90.2 million during the same period in 2011. Net income during the quarter was $6.7 million compared to $7.7 million in the third quarter 2011, a 13.0% decrease. Earnings per share were $0.32 and $0.37 for the respective periods.

Net sales for the nine months ended September 30, 2012 increased 7.7% to a record $287.0 million compared to $266.4 million during the same period in 2011. Both years benefited from increases in our seasonal agriculture market business contributed by our 2010 acquisition of National Pump Company. Net income increased 3.4% to a record $24.5 million compared to $23.7 million in the first nine months of 2011. Earnings per share were $1.17 and $1.13 for the respective periods.

Sales increased a modest 1.6% during the quarter compared to the same period last year. Sales improved 10.3% in our larger water markets group and declined 12.0% in our non-water markets. Major contributions to water market sales were shipments of pumps for domestic flood control, and shipments of pumps for water supply and sewage systems domestically and internationally. The quarter’s non-water market decreases were primarily in the OEM market due to the scale-down of U.S. military operations overseas, and shipments of fabricated products related to power generation declined due to the slow and unsteady economic recovery and related reduced power demands in North America.

 

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Table of Contents

PART I—CONTINUED

 

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

 

The decrease in earnings for the quarter was principally driven by a less favorable product mix among the market groups, combined with selling, general and administrative expense increases due to healthcare costs and the completion of the Pumptron acquisition.

The Company’s backlog of orders was $146.7 million at September 30, 2012 compared to $157.9 million a year ago and $155.5 million at December 31, 2011. The planned decrease in backlog from September 30, 2011 and December 31, 2011 was primarily due to record shipments during the twelve months ending September 30, 2012 combined with lower incoming orders for the construction market. The backlog is expected to be boosted in the first quarter of 2013 by approximately $70 million based on a letter of intent to the Company to supply major flood control pumps for a member of the joint venture construction group for a significant New Orleans flood control project as announced by the Company October 1, 2012. The award of this joint venture project has been protested by unsuccessful bidders and is expected to be resolved by the end of January 2013.

The Company remains focused on providing high quality products, executing on profitable growth and acquisition opportunities and maintaining a very strong balance sheet which provides excellent financial flexibility. We expect to continue to encounter headwinds in the near-term related to the very uncertain domestic and global macroeconomic conditions important to most of the markets the Company serves.

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 pumps and pump related equipment for industrial and agricultural applications, will provide excellent growth opportunities for Gorman-Rupp in the future.

The Company’s defined benefit pension plan administrator confirmed that the actuarial payment threshold relating to retirees receiving lump-sum distributions was exceeded during October 2012. As a result, a pension settlement loss estimated to be $2.1 million and approximately $0.10 to $0.12 per share, net of income taxes, will be required by GAAP to be recorded during the fourth quarter 2012.

Third Quarter 2012 Compared to Third Quarter 2011

Net Sales

 

      Three Months Ended
September 30,
               

(Thousands of dollars)

   2012      2011      $ Change      % Change  

Net sales

   $ 91,626       $ 90,215       $ 1,411         1.6

 

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Table of Contents

PART I—CONTINUED

 

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

 

Sales increased $5.1 million in the water markets group primarily due to increased sales in the municipal market of $6.3 million principally due to shipments of pumps for domestic flood control, and shipments of pumps for water supply and sewage systems domestically and internationally. Also, sales in the fire protection market increased $1.9 million primarily as a result of international shipments. The construction market decreased $3.3 million due to continued reduced demand for pumps for natural gas drilling applications and from decreases in rental businesses relative to the higher level of sales experienced during 2011 due to pent-up demand.

Sales decreased $3.5 million in the non-water markets group primarily due to lower sales in the OEM market largely as a result of the scale-down of U.S. military operations overseas and reduced shipments of fabricated products related to power generation.

Cost of Products Sold and Gross Profit

 

(Thousands of dollars)

   Three Months Ended
September 30,
              
   2012     2011     $ Change      % Change  

Cost of products sold

   $ 69,796      $ 67,748      $ 2,048         3.0

% of Net sales

     76.2     75.1     

Gross profit

     23.8     24.9     

The decrease in the gross margin percentage was principally due to a less favorable product mix among the market groups driven primarily by lower sales in the OEM and construction markets. In addition, warranty and healthcare expense increased $378,000 and $341,000, respectively.

Selling, General and Administrative Expenses (SG&A)

 

(Thousands of dollars)

   Three Months Ended
September 30,
              
   2012     2011     $ Change      % Change  

Selling, general and administrative expenses (SG&A)

   $ 11,727      $ 10,941      $ 786         7.2

% of Net sales

     12.8     12.1     

The increase in SG&A expenses was principally due to increases in professional fees of $223,000 primarily due to the acquisition of Pumptron and associated legal fees, and in travel and advertising expenses of $139,000 related to trade shows. Also, a change in the allocation of profit sharing in the third quarter 2012 compared to the same period last year resulted in an increase of $268,000.

 

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Table of Contents

PART I—CONTINUED

 

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

 

Net Income

 

(Thousands of dollars)

   Three Months Ended
September 30,
             
   2012     2011     $ Change     % Change  

Income before income taxes

   $ 10,141      $ 11,202      $ (1,061     (9.5 %) 

% of Net sales

     11.1     12.4    

Income taxes

   $ 3,435      $ 3,547      $ (112     (3.2 %) 

Effective tax rate

     33.9     31.7    

Net income

   $ 6,706      $ 7,655      $ (949     (12.4 %) 

% of Net sales

     7.3     8.5    

Earnings per share

   $ 0.32      $ 0.37      $ (0.05     (13.5 %) 

The decrease in net income was primarily due to the factors described above, including the negative impacts of a less favorable product mix combined with selling, general and administrative expense increases. The difference in the effective tax rate between the two periods is primarily due to the federal research and development tax credit that has not been extended for 2012, I.R.S. audit adjustments relating to transfer pricing for tax years 2009 and 2010 paid in 2012, and higher earnings in the third quarter 2011 in foreign jurisdictions taxed at lower rates relative to the United States.

Nine Months 2012 Compared to Nine Months 2011

Net Sales

 

(Thousands of dollars)

   Nine Months Ended
September 30,
               
   2012      2011      $ Change      % Change  

Net sales

   $ 287,034       $ 266,448       $ 20,586         7.7

Record nine-month sales included increases in both the water and non-water market groups. The larger water markets group increased $13.2 million primarily due to improved sales of $9.5 million in the fire protection market due to an increase in sales internationally and higher sales of $4.5 million in the agriculture market due to agricultural cash-flow benefits from high commodity prices and drought conditions in the United States. The non-water markets group increased $8.0 million primarily due to higher sales in the petroleum and industrial markets related to oil and natural gas drilling.

 

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PART I—CONTINUED

 

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

 

Cost of Products Sold and Gross Profit

 

(Thousands of dollars)

   Nine Months Ended
September 30,
              
   2012     2011     $ Change      % Change  

Cost of products sold

   $ 215,789      $ 198,346      $ 17,443         8.8

% of Net sales

     75.2     74.4     

Gross profit

     24.8     25.6     

The decrease in the gross margin percentage was principally due to a less favorable product mix among the market groups driven primarily by lower sales in the OEM and construction markets. In addition, healthcare and depreciation expense increased $952,000 and $485,000, respectively.

Selling, General and Administrative Expenses (SG&A)

 

(Thousands of dollars)

   Nine Months Ended
September 30,
              
   2012     2011     $ Change      % Change  

Selling, general and administrative expenses (SG&A)

   $ 34,420      $ 32,436      $ 1,984         6.1

% of Net sales

     12.0     12.2     

The increase in SG&A expenses was principally due to increases of $449,000 in wage costs and $501,000 in travel and advertising expenses related to trade shows. Also, a change in the allocation of profit sharing in 2012 compared to 2011 resulted in an increase of $470,000.

Net Income

 

(Thousands of dollars)

   Nine Months Ended
September 30,
              
   2012     2011     $ Change      % Change  

Income before income taxes

   $ 37,110      $ 35,245      $ 1,865         5.3

% of Net sales

     12.9     13.2     

Income taxes

   $ 12,595      $ 11,546      $ 1,049         9.1

Effective tax rate

     33.9     32.8     

Net income

   $ 24,515      $ 23,699      $ 816         3.4

% of Net sales

     8.5     8.9     

Earnings per share

   $ 1.17      $ 1.13      $ 0.04         3.5

 

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PART I—CONTINUED

 

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

 

The increase in net income was primarily due to the factors described above. The difference in the effective tax rate between the two periods was primarily due to the federal research and development tax credit that has not been extended for 2012 resulting in a decrease of $0.01 per share and I.R.S audit adjustments relating to transfer pricing for tax years 2009 and 2010 paid in 2012.

Liquidity and Capital Resources

 

(Thousands of dollars)

   Nine Months Ended
September 30
 
   2012     2011  

Net cash provided by operating activities

   $ 20,665      $ 18,305   

Net cash used for investing activities

     (18,171     (7,975

Net cash used for financing activities

     (8,088     (15,568

Cash and cash equivalents and short-term investments totaled $15.0 million, and there was $8.0 million in outstanding bank debt at September 30, 2012. In addition, the Company had $24.3 million available in bank lines of credit after deducting $5.7 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 September 30, 2012.

Working capital increased 8.3% from December 31, 2011 to $113.7 million at September 30, 2012 primarily due to increased inventory and current accounts receivable.

Liquidity Ratios

 

     Nine Months Ended
September 30,
 
     2012      2011      2010  

Days sales in accounts receivable

     56         55         56   

Days in accounts payable

     25         28         27   

Days in inventory

     164         152         150   

The change in cash provided by operating activities of $2.4 million in the nine months of 2012 compared to the same period in 2011 was primarily due to a reduction between periods in the use of cash required to fund inventory and changes in accounts payable balances.

During the first nine months of 2012, investing activities of $18.2 million primarily consisted of capital expenditures of $2.4 million for an expansion of the National Pump Company facilities and $10.8 million of machinery and equipment. In addition, $4.8 million of cash was used for the acquisition of Pumptron. Capital expenditures for the full year 2012, consisting principally of machinery and equipment, are estimated to be $15 to $18 million and are expected to be financed through internally generated funds and existing lines of credit.

 

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PART I—CONTINUED

 

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

 

Net cash used for financing activities for the nine months ended September 30, 2012 consisted of dividend payments of $6.1 million and re-payment of $2.0 million in short-term debt. The ratio of current assets to current liabilities was 3.3 to 1 at September 30, 2012 and 3.1 to 1 at December 31, 2011.

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, 2011 contained in our Fiscal 2011 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.

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: Certain statements in this Item and elsewhere herein are 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 about important economic, political, and technological factors, among others, and are subject to risk and uncertainties, 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, 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; and (7) 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.

 

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PART I—CONTINUED

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 diversified export sales. Export sales generally are denominated in U.S. Dollars and made on open account or under letters of credit.

 

ITEM 4. CONTROLS AND PROCEDURES

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.

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 September 30, 2012.

Changes in Internal Control Over Financial Reporting

There have been 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.

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

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, 2011.

 

ITEM 1A. RISK FACTORS

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, 2011.

 

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ITEM 6. 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 Wayne L. Knabel, 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.
Exhibit 101    Financial statements from the Quarterly Report on Form 10-Q of The Gorman-Rupp Company for the quarter ended September 30, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.

 

* 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.

 

    The Gorman-Rupp Company
          (Registrant)
Date: October 29, 2012    
  By:   /s/Wayne L. Knabel
    Wayne L. Knabel
    Chief Financial Officer

 

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