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GRC > SEC Filings for GRC > Form 10-Q on 28-Oct-2013All Recent SEC Filings

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Form 10-Q for GORMAN RUPP CO


28-Oct-2013

Quarterly Report


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

Executive Overview and Outlook

Net sales during the third quarter 2013 increased 10.4% to $101.2 million compared to $91.6 million during the same period in 2012. Domestic sales increased 18.3% or $10.7 million while international sales decreased 3.3% or $1.1 million. The increase in sales in our water end markets of $1.8 million was primarily due to increased shipments for the agriculture and fire protection markets of $5.6 million, partially offset by decreased shipments for Gulf Coast flood control projects of $3.9 million. Sales in our non-water end markets of $7.7 million increased primarily due to shipments for the OEM market of $4.3 million related to power generation equipment and military applications and for the industrial market of $2.2 million.

Net sales for the nine months ended September 30, 2013 were a record $300.1 million compared to $287.0 million during the same period in 2012, an increase of 4.5%. The increase in water end market sales of $11.5 million was primarily due to shipments for the fire and agricultural markets and for Gulf Coast flood control projects in the first half of 2013. This increase was partially offset by reduced construction market demand for pumps from rental businesses as compared to this market's strong sales early last year. Increased international shipments for the petroleum market were the major contributor to the increase in our non-water market sales of $1.5 million.

Due to continuing lump-sum retirement payments, the Company recorded a GAAP-required $490,000 non-cash pension settlement charge during the third quarter of 2013 relating to its defined benefit pension plan. The Company has recorded a total of $3.5 million in non-cash pension settlement charges during the first nine months of 2013. These required charges were driven by exceeding the actuarial payments threshold relating to retirees electing to receive lump-sum distributions during 2013. A non-cash pension settlement charge was not required to be recognized in 2012 until the actuarial payments threshold was exceeded in the fourth quarter.

Gross profit was $24.5 million for the third quarter 2013 resulting in gross margin of 24.2% compared to 23.8% in the same period last year. The increase in gross margin was principally due to sales mix changes during the current quarter. Operating income was $12.0 million resulting in operating margin of 11.9% compared to 11.0% in the third quarter 2012. Excluding the pension settlement charge described above, gross margin would have been 24.5% and operating margin would have been 12.4% for the third quarter of 2013.

Net income increased 18.5% during the quarter to $7.9 million compared to $6.7 million in the third quarter 2012 and earnings per share were $0.38 and $0.32 for the respective periods. Excluding the non-cash pension settlement charge of $0.02 per share, earnings would have been $0.40 for the third quarter 2013.

Gross profit was $72.2 million for the first nine months of 2013 resulting in gross margin of 24.1% compared to 24.8% in the same period last year. The decline in gross margin was principally due to the non-cash pension settlement charges described above of 70 basis points plus about 20 basis points due to increases in healthcare costs and depreciation expense. Operating income was $33.8 million resulting in operating margin of 11.3% compared to 12.8% in the first nine months of 2012. Excluding the pension settlement charge, gross margin would have been 24.8% and operating margin would have been 12.4% for the first nine months of 2013.


Table of Contents

PART I - CONTINUED

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

Net income was $22.9 million during the first nine months of 2013 compared to $24.5 million in the same period last year and earnings per share were $1.09 and $1.17 for the respective periods. Excluding the non-cash pension settlement charge of $2.3 million net of income taxes and equating to $0.11 per share, earnings would have been $1.20 per share for the current nine months.

The Company's backlog of orders was $190.7 million at September 30, 2013 compared to $146.7 million a year ago and $143.4 million at December 31, 2012. The increase in backlog reflects the award of the Permanent Canal Closure Project ("PCCP") contract of approximately $60.0 million to supply major flood control pumps to a member of a joint venture construction group for a significant New Orleans flood control project. The pumps are expected to be shipped primarily in the second half of 2014 and first half of 2015.

The Company's balance sheet continues to remain strong and flexible as cash and short-term investments totaled $33.8 million and short-term bank debt was reduced to $9.0 million at September 30, 2013. Working capital increased 16.6% from December 31, 2012 to a record $129.3 million at September 30, 2013 principally due to increased 2013 net sales and debt reduction. The Company expects net capital expenditures for the fourth quarter of 2013 will be approximately $12.0 million, primarily for machinery and equipment.

At its October 24, 2013 meeting, the Board of Directors of the Company declared a five-for-four split of the Company's Common Shares in the form of a distribution of one additional Common Share for each four Common Shares previously issued. The distribution will be made on December 10, 2013 to shareholders of record at the close of business on November 15, 2013.

After giving effect to the issuance of the additional Common Shares in the distribution, the most recent quarterly cash dividend rate of $0.10 per Common Share on a post-split basis would be equivalent to $0.08 per share.

In an additional action, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per share on the common stock of the Company, payable December 10, 2013, to shareholders of record November 15, 2013. The cash dividend is payable on post-split shares and represents a 12.5% increase over the equivalent post-split dividend paid during the previous quarter. This marks the 255th consecutive dividend paid by The Gorman-Rupp Company and the 41st consecutive year of increased dividends paid to its shareholders.

We believe that the Company is well positioned to grow organically at generally comparable operating margins over the long term by expanding our customer base both domestically and globally, and through new product offerings. We expect that the increasing need for water and wastewater infrastructure rehabilitation within the United States, and similar needs internationally, along with increasing demand for high quality pumps and pump systems for industrial and agricultural applications, will provide excellent growth opportunities for Gorman-Rupp in the future.


Table of Contents

PART I - CONTINUED

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

Third Quarter 2013 Compared to Third Quarter 2012

Net Sales

Three Months Ended
September 30,
(Thousands of dollars) 2013 2012 $ Change % Change Net sales $ 101,186 $ 91,626 $ 9,560 10.4 %

Sales increased $1.8 million in our water end markets primarily due to increased shipments for the agriculture and fire protection markets of $5.6 million, partially offset by decreased shipments for Gulf Coast flood control projects of $3.9 million.

Sales increased $7.2 million in the non-water markets primarily due to increased shipments for the OEM market of $4.3 million related to power generation equipment and military applications and for the industrial market of $2.2 million.

Cost of Products Sold and Gross Profit



                                  Three Months Ended
                                     September 30,
       (Thousands of dollars)     2013           2012         $ Change      % Change
       Cost of products sold    $  76,701      $ 69,796      $    6,905           9.9 %
       % of Net sales                75.8 %        76.2 %
       Gross profit                  24.2 %        23.8 %

The increase in gross margin was principally due to sales mix changes during the quarter, but was reduced by 30 basis points as a result of the non-cash pension settlement charge described above.

Selling, General and Administrative Expenses (SG&A)



                                                Three Months Ended
                                                   September 30,
(Thousands of dollars)                         2013             2012          $ Change        % Change
Selling, general and administrative
expenses (SG&A)                              $  12,448        $ 11,727        $     721             6.1 %
% of Net sales                                    12.3 %          12.8 %

The decrease in SG&A expenses as a percent of net sales is principally due to increased sales during the quarter, partially offset by 50 basis points as a result of the non-cash pension settlement charge described above. Third quarter 2012 included costs related to the completion of the Pumptron acquisition which did not reoccur in third quarter 2013.


Table of Contents

PART I - CONTINUED

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

Net Income



                                    Three Months Ended
                                       September 30,
     (Thousands of dollars)         2013           2012         $ Change       % Change
     Income before income taxes   $  11,967      $ 10,141      $    1,826           18.0 %
     % of Net sales                    11.8 %        11.1 %
     Income taxes                 $   4,021      $  3,435      $      586           17.1 %
     Effective tax rate                33.6 %        33.9 %
     Net income                   $   7,946      $  6,706      $    1,240           18.5 %
     % of Net sales                     7.9 %         7.3 %
     Earnings per share           $    0.38      $   0.32      $     0.06           18.8 %

The increase in net income was primarily due to the factors described above, including increased sales during the current quarter of $9.6 million and acquisition-related costs in third quarter 2012 which did not reoccur third quarter 2013. The increase was partially offset by the $326,000 non-cash pension settlement charge, net of income taxes, described above. Excluding the non-cash pension settlement charge of $0.02 per share, earnings would have been $0.40 for the third quarter 2013. The difference in the effective tax rate between the two periods is primarily due to the federal research and development tax credit which was reinstated and extended in January 2013 from January 1, 2012 to December 31, 2013, and was not permitted to be recorded in 2012 under current accounting rules based on the date of the reinstatement's enactment.

Nine Months 2013 Compared to Nine Months 2012

Net Sales

Nine Months Ended
September 30,
(Thousands of dollars) 2013 2012 $ Change % Change Net sales $ 300,058 $ 287,034 $ 13,024 4.5 %

Sales increased $11.5 million in our water end markets primarily due to increased shipments for Gulf Coast flood control projects of $4.3 million and for the fire and agriculture markets of $8.0 million and $8.3 million, respectively. This increase was partially offset by reduced construction market demand of $9.3 million primarily related to pumps from rental businesses as compared to the strong sales in the first quarter of 2012.

Sales increased $2.3 million in the non-water markets primarily due to international shipments for the petroleum market.


Table of Contents

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



                                   Nine Months Ended
                                     September 30,
       (Thousands of dollars)     2013           2012         $ Change      % Change
       Cost of products sold    $ 227,868      $ 215,789      $  12,079           5.6 %
       % of Net sales                75.9 %         75.2 %
       Gross profit                  24.1 %         24.8 %

The decrease in the gross profit percentage was principally due to the non-cash pension settlement charge described above of $2.3 million or 70 basis points.

Selling, General and Administrative Expenses (SG&A)



                                               Nine Months Ended
                                                 September 30,
(Thousands of dollars)                        2013            2012           $ Change         % Change
Selling, general and administrative
expenses (SG&A)                             $ 38,379        $ 34,420        $    3,959             11.5 %
% of Net sales                                  12.8 %          12.0 %

The increase in SG&A expenses is principally due to the expenses incurred in the first nine months of 2013 from the two acquisitions made in late 2012 and the non-cash pension settlement charge described above of $1.2 million or 40 basis points.

Net Income



                                    Nine Months Ended
                                      September 30,
     (Thousands of dollars)         2013          2012        $ Change        % Change
     Income before income taxes   $ 33,690      $ 37,110      $  (3,420 )          (9.2 )%
     % of Net sales                   11.2 %        12.9 %
     Income taxes                 $ 10,758      $ 12,595      $  (1,837 )         (14.6 )%
     Effective tax rate               31.9 %        33.9 %
     Net income                   $ 22,932      $ 24,515      $  (1,583 )          (6.5 )%
     % of Net sales                    7.6 %         8.5 %
     Earnings per share           $   1.09      $   1.17      $   (0.08 )          (6.8 )%


Table of Contents

PART I - CONTINUED

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

The decrease in net income was primarily due to the factors explained above, including the $2.3 million non-cash pension settlement charge described above, net of income taxes. Excluding the non-cash pension settlement charge of $0.11 per share, earnings would have been $1.20 for the current nine months. The difference in the effective tax rate between the two periods is primarily due to the federal research and development tax credit which was reinstated and extended in January 2013 from January 1, 2012 to December 31, 2013, and was not permitted to be recorded in 2012 under current accounting rules based on the date of the reinstatement's enactment.

Liquidity and Capital Resources



                                                       Nine Months Ended
                                                         September 30,
        (Thousands of dollars)                        2013           2012
        Net cash provided by operating activities   $  37,714      $  20,665
        Net cash used for investing activities         (5,120 )      (18,171 )
        Net cash used for financing activities        (19,300 )       (8,088 )

Cash and cash equivalents and short-term investments totaled $33.8 million, and there was $9.0 million in outstanding bank debt at September 30, 2013. In addition, the Company had $25.6 million available in bank lines of credit after deducting $4.4 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, 2013.

Working capital increased 16.6% from December 31, 2012 to a record $129.3 million at September 30, 2013 principally due to record 2013 net sales and debt reduction.

The primary driver of operating cash flows during the first nine months of 2013 was net earnings after removing the impact of the non-cash pension settlement charges and reduced inventory levels, partially offset by increased accounts receivable due to record sales during the first nine months of 2013. During this same period in 2012 operating cash flows were primarily driven by a reduction in the use of cash required to fund inventory and changes in accounts payable balances compared to the first nine months of 2011.

During the first nine months of 2013, investing activities of $5.1 million primarily consisted of capital expenditures for machinery and equipment. Net capital expenditures for 2013, consisting principally of machinery and equipment, are estimated to be in the range of $16 to $17 million and are expected to be principally financed through internally generated funds. During the first nine months of 2012, investing activities of $18.2 million consisted primarily 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.


Table of Contents

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, 2013 consisted of dividend payments of $6.3 million and re-payment of $13.0 million in short-term debt. The ratio of current assets to current liabilities was 3.2 to 1 at September 30, 2013 and 2.7 to 1 at December 31, 2012.

On October 24, 2013 meeting, the Board of Directors of the Company declared a five-for-four split of the Company's Common Shares in the form of a distribution of one additional Common Share for each four Common Shares previously issued. The distribution will be made on December 10, 2013 to shareholders of record at the close of business on November 15, 2013.

In an additional action, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per share on the common stock of the Company, payable December 10, 2013, to shareholders of record November 15, 2013. The cash dividend is payable on post-split shares and represents a 12.5% increase over the equivalent post-split dividend paid during the previous quarter. This marks the 255th consecutive dividend paid by The Gorman-Rupp Company and the 41st consecutive year of increased dividends paid to its shareholders.

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, 2012 contained in our Fiscal 2012 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: This Quarterly Report on Form 10-Q contains various forward-looking statements based on assumptions concerning The Gorman-Rupp Company's operations, future results and prospects. These forward-looking statements are based on current expectations about important economic, political, and technological factors, among others, and are subject to risks and uncertainties, which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.


Table of Contents

PART I - CONTINUED

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

Such factors include, but are not limited to: (1) continuation of the current and expected future business environment; (2) changes in government budgets and in laws and regulations, including taxes; (3) the successful integration of acquisitions; (4) the Company's future non-cash pension settlement charges;
(5) unforeseen delays or disruptions in the New Orleans flood control project; and (6) the Company's future cash flow and financial condition. 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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