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GRC > SEC Filings for GRC > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for GORMAN RUPP CO

Form 10-Q for GORMAN RUPP CO


30-Jul-2014

Quarterly Report


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

Executive Overview and Outlook

Net sales during the second quarter of 2014 increased 3.1% to $109.7 million compared to $106.4 million during the same period in 2013. Domestic sales increased 11.9% or $8.3 million while international sales decreased 13.5% or $5.0 million. Sales in water end markets increased 1.1% or $0.7 million and sales in non-water end markets increased 5.7% or $1.8 million during the second quarter.


Table of Contents

PART I - CONTINUED

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

The second quarter increase in water end market sales was largely due to increased sales in the municipal market of $5.1 million driven by large volume pumps related to wastewater and flood control. This increase was partially offset by lower fire protection sales of $3.2 million due to timing of shipments and lower agriculture sales driven by wet weather conditions. Sales increased $1.8 million in non-water markets primarily due to increased shipments for the OEM market related to power generation equipment and pumps for residential appliances.

Net sales for the six months ended June 30, 2014 were a record $219.8 million compared to $198.9 million during the same period in 2013, an increase of 10.5%. Domestic sales increased 16.0% or $20.7 million while international sales were comparable to the same period in 2013. Sales increased $12.7 million in water end markets primarily due to higher sales in the municipal market of $9.4 million driven by large volume pumps related to wastewater, water supply and flood control. In addition, sales in the construction market increased $4.6 million principally for pumps for rental businesses and for oil and gas drilling and fracking within North America. These increases were reduced by lower agriculture sales of $2.1 million in large part driven by wet weather conditions. Sales increased $6.6 million in non-water markets primarily due to increased shipments for the OEM market related to power generation equipment and pumps for military applications and residential appliances.

Gross profit was $26.9 million for the second quarter of 2014, resulting in gross margin of 24.5% compared to 24.9% in the same period in 2013. The decrease in gross margin was principally due to increased cost of material primarily from the purchase of completed components for our previously disclosed Permanent Canal Closure and Pumps ("PCCP") project driven by timing and capacity constraints, and freight costs due mostly to PCCP flood control project specialized shipments. These costs and some additional temporary labor totaled 160 basis points. Operating income was $13.4 million, resulting in operating margin of 12.2% in the second quarter of 2014 compared to 12.7% in the same period in 2013. The gross margin and operating margin for the second quarter of 2013 were reduced by 100 and 150 basis points, respectively, due to a non-cash pension settlement charge which did not recur in the second quarter of 2014.

Net income was $8.9 million during the second quarter of 2014 compared to $9.2 million in the second quarter of 2013 and earnings per share were $0.34 and $0.35 for the respective periods. Earnings per share for the second quarter of 2013 included a reduction of $0.04 due to a non-cash pension settlement charge which did not recur in the second quarter of 2014.

Gross profit was a record $54.5 million in the first six months of 2014 resulting in gross margin of 24.8% compared to 24.0% in 2013. Operating income also was a record $28.1 million resulting in operating margin of 12.8% in the first six months of 2014 compared to 10.9% in 2013. The gross margin and operating margin for the first six months of 2013 were reduced by 100 and 160 basis points, respectively, due to a non-cash pension settlement charge which did not recur in the second quarter of 2014.

Net income for the first six months of 2014 was a record $18.8 million compared to $15.0 million in 2013 and earnings per share were $0.72 and $0.57 for the respective periods. Earnings per share for the first six months of 2013 included a reduction of $0.07 due to a non-cash pension settlement charge which did not recur in the first six months of 2014.


Table of Contents

PART I - CONTINUED

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

The Company's backlog of orders was $173.8 million at June 30, 2014 compared to $182.2 million at December 31, 2013. Incoming orders grew 12.6% during the current quarter compared to the previous quarter reflecting increased activity across both our water and non-water end markets. The $8.4 million decrease in backlog is principally due to record shipments during the first six months of 2014. Approximately $53.5 million of the PCCP project to supply major flood control pumps to a member of a joint venture construction group for a significant New Orleans flood control project remain in the June 30, 2014 backlog total. The pumps for this project are expected to be shipped primarily in the second half of 2014 and first half of 2015.

Cash and short-term investments totaled $29.7 million and short-term bank debt was $22.7 million at June 30, 2014. During the second quarter of 2014, $18.0 million was borrowed to fund the acquisition of the assets of Bayou City Pump Company. Working capital rose $0.7 million from December 31, 2013 to $129.2 million at June 30, 2014. Net capital expenditures for 2014, consisting principally of machinery and equipment and building improvements, are estimated to be in the range of $12 to $14 million and are expected to be financed through internally generated funds.

At its July 24, 2014 meeting, 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 September 10, 2014, to shareholders of record August 15, 2014. This marks the 258th consecutive dividend paid by The Gorman-Rupp Company.

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.

Second Quarter 2014 Compared to Second Quarter 2013

Net Sales

Three Months Ended
June 30,
(Thousands of dollars) 2014 2013 $ Change % Change Net sales $ 109,728 $ 106,415 $ 3,313 3.1 %

Sales increased $0.7 million in water end markets due to increased sales in the municipal market of $5.1 million driven by large volume pumps related to wastewater and flood control. This increase was reduced by lower fire protection sales of $3.2 million due to timing of shipments and lower agriculture sales driven by wet weather conditions.

Sales increased $1.8 million in non-water markets primarily due to increased shipments for the OEM market related to power generation equipment and pumps for residential appliances.


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



                                  Three Months Ended
                                       June 30,
       (Thousands of dollars)     2014           2013         $ Change      % Change
       Cost of products sold    $  82,824      $ 79,934      $    2,890           3.6 %
       % of Net sales                75.5 %        75.1 %
       Gross margin                  24.5 %        24.9 %

The decrease in gross margin was principally due to increased cost of materials of 80 basis points primarily from the purchase of completed components for the PCCP project driven by capacity and timing constraints and increased freight cost. In addition, labor increased 70 basis points due to increased headcount. Cost of products sold for the second quarter of 2013 as a percent of net sales included 100 basis points due to a pension settlement charge which did not recur in the second quarter of 2014.

Selling, General and Administrative Expenses (SG&A)



                                                Three Months Ended
                                                     June 30,
(Thousands of dollars)                         2014             2013          $ Change        % Change
Selling, general and administrative
expenses (SG&A)                              $  13,483        $ 12,964        $     519             4.0 %
% of Net sales                                    12.3 %          12.2 %

The increase in SG&A expenses as a percent of net sales is principally due to increases in travel and advertising of 20 basis points related to trade shows and in professional fees of 21 basis points due to legal and recruitment fees. The remaining increase in SG&A expenses as a percent of net sales is a combination of several smaller expense changes. SG&A expenses for the second quarter of 2013 as a percent of net sales included 50 basis points due to a pension settlement charge which did not recur in the second quarter of 2014.


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
                                        June 30,
    (Thousands of dollars)         2014           2013         $ Change        % Change
    Income before income taxes   $  13,228      $ 13,496      $     (268 )          (2.0 )%
    % of Net sales                    12.1 %        12.7 %

    Income taxes                 $   4,368      $  4,328      $       40             0.9 %
    Effective tax rate                33.0 %        32.1 %

    Net income                   $   8,860      $  9,168      $     (308 )          (3.4 )%
    % of Net sales                     8.1 %         8.6 %

    Earnings per share           $    0.34      $   0.35      $    (0.01 )          (2.9 )%

The decreases in net income and earnings per share were primarily due to the factors explained above, including higher cost of materials, labor and SG&A expenses. 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 2014.

Six Months 2014 Compared to Six Months 2013

Net Sales

Six Months Ended
June 30,
(Thousands of dollars) 2014 2013 $ Change % Change Net sales $ 219,792 $ 198,872 $ 20,920 10.5 %

Sales increased $12.7 million in water end markets due to increased sales in the municipal market of $9.4 million driven by large volume pumps related to wastewater, water supply and flood control. In addition, sales in the construction market increased $4.6 million principally for pumps for rental businesses and for oil and gas drilling and fracking within North America. These increases were reduced by lower agriculture sales of $2.1 million driven in large part by wet weather conditions.

Sales increased $6.6 million in non-water markets primarily due to increased shipments for the OEM market related to power generation equipment and pumps for military applications and residential appliances.


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



                                    Six Months Ended
                                        June 30,
       (Thousands of dollars)     2014           2013         $ Change      % Change
       Cost of products sold    $ 165,334      $ 151,167      $  14,167           9.4 %
       % of Net sales                75.2 %         76.0 %
       Gross margin                  24.8 %         24.0 %

The increase in gross margin for the six month period ended June 30, 2014 was principally due to a pension settlement charge in the first six month of 2013 of 100 basis points which did not recur during the same period of 2014.

Selling, General and Administrative Expenses (SG&A)



                                                 Six Months Ended
                                                     June 30,
(Thousands of dollars)                         2014            2013          $ Change        % Change
Selling, general and administrative
expenses (SG&A)                              $ 26,344        $ 25,931        $     413             1.6 %
% of Net sales                                   12.0 %          13.0 %

The decrease in SG&A expenses as a percent of net sales is principally due to a pension settlement charge in the first six months of 2013 of 50 basis points which did not recur in the first six months of 2014.

Net Income



                                     Six Months Ended
                                         June 30,
     (Thousands of dollars)         2014          2013         $ Change       % Change
     Income before income taxes   $ 28,060      $ 21,723      $    6,337           29.2 %
     % of Net sales                   12.8 %        10.9 %

     Income taxes                 $  9,246      $  6,737      $    2,509           37.2 %
     Effective tax rate               33.0 %        31.0 %

     Net income                   $ 18,814      $ 14,986      $    3,828           25.5 %
     % of Net sales                    8.6 %         7.5 %

     Earnings per share           $   0.72      $   0.57      $     0.15           26.3 %

The increases in net income and earnings per share were primarily due to increased sales during the six month period ended June 30, 2014 of $20.9 million, and a pension settlement charge, net of income taxes, of $2.0 million in the first six months of 2013 which did not recur in the first six months of 2014. 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 2014.


Table of Contents

PART I - CONTINUED

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

Liquidity and Capital Resources



                                                              Six Months Ended
                                                                  June 30,
   (Thousands of dollars)                                   2014           2013
   Net cash provided by operating activities              $  11,985      $  21,088
   Net cash used for investing activities                   (21,868 )       (3,396 )
   Net cash provided by (used for) financing activities       8,941        (11,199 )

Cash and cash equivalents and short-term investments totaled $29.7 million, and there was $22.7 million in outstanding bank debt at June 30, 2014. In addition, the Company had $26.1 million available in bank lines of credit after deducting $3.9 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 June 30, 2014.

Working capital increased $0.7 million from December 31, 2013 to $129.2 million at June 30, 2014 principally due to higher accounts receivable driven by record sales during the first six months of 2014.

The primary driver of operating cash flows during the first six months of 2014 was increased accounts receivable due to record sales during the period. During this same period in 2013 operating cash flows were primarily driven by a reduction in the use of cash required to fund inventory, partially offset by increased accounts receivable.

During the first six months of 2014, investing activities of $21.9 million primarily consisted of the purchase of the business of Bayou City Pump Company and capital expenditures for machinery and equipment and building improvements. Net capital expenditures for 2014, consisting principally of machinery and equipment and building improvements, are estimated to be in the range of $12 to $14 million and are expected to be principally financed through internally generated funds. During the first six months of 2013, investing activities of $3.4 million consisted primarily of capital expenditures for machinery and equipment.

Net cash used for financing activities for the first six months of 2014 consisted of dividend payments of $4.7 million and re-payment of $4.3 million in short-term debt. During the second quarter of 2014, $18.0 million was borrowed to fund the acquisition of Bayou City Pump Company. The ratio of current assets to current liabilities was 2.7 to 1 at June 30, 2014 and 3.1 to 1 at December 31, 2013.

On July 24, 2014, 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 September 10, 2014, to shareholders of record August 15, 2014. This marks the 258th consecutive dividend paid by The Gorman-Rupp Company.


Table of Contents

PART I - CONTINUED

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

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, 2013 contained in our Fiscal 2013 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 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.

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 initiatives of The Gorman-Rupp Company; (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;
(7) unforeseen delays or disruptions in the New Orleans flood control project; and (8) continuation of the favorable environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates and our ability to successfully integrate and realize the anticipated benefits of completed acquisitions. 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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