EXHIBIT (13)
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
The Gorman-Rupp Company
The Gorman-Rupp Company
We have audited the accompanying consolidated balance sheets of The Gorman-Rupp Company as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Gorman-Rupp Company at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Gorman-Rupp Company’s internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 5, 2010
March 5, 2010
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Consolidated Statements of Income
Year ended December 31, | ||||||||||||
(Thousands of dollars, except per share amounts) | 2009 | 2008 | 2007 | |||||||||
Net sales | $ | 266,242 | $ | 330,646 | $ | 305,562 | ||||||
Cost of products sold | 204,469 | 253,557 | 238,110 | |||||||||
Gross profit | 61,773 | 77,089 | 67,452 | |||||||||
Selling, general and administrative expenses | 35,380 | 38,101 | 34,567 | |||||||||
Operating income | 26,393 | 38,988 | 32,885 | |||||||||
Other income | 1,209 | 2,113 | 2,574 | |||||||||
Other expense | (347 | ) | (607 | ) | (76 | ) | ||||||
Income before income taxes | 27,255 | 40,494 | 35,383 | |||||||||
Income taxes | 8,986 | 13,297 | 12,524 | |||||||||
Net income | $ | 18,269 | $ | 27,197 | $ | 22,859 | ||||||
Earnings per share | $ | 1.09 | $ | 1.63 | $ | 1.37 | ||||||
Average number of shares outstanding | 16,709,047 | 16,705,210 | 16,701,175 |
See notes to consolidated financial statements.
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Consolidated Balance Sheets
December 31, | ||||||||
(Thousands of dollars) | 2009 | 2008 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 44,403 | $ | 23,793 | ||||
Short-term investments | 1,505 | — | ||||||
Accounts receivable | 37,239 | 48,200 | ||||||
Inventories: | ||||||||
Raw materials and in-process | 22,087 | 32,996 | ||||||
Finished parts | 16,026 | 20,288 | ||||||
Finished products | 2,393 | 3,597 | ||||||
40,506 | 56,881 | |||||||
Deferred income taxes | 2,333 | 1,198 | ||||||
Prepaid and other | 5,414 | 4,194 | ||||||
Total current assets | 131,400 | 134,266 | ||||||
Property, plant and equipment: | ||||||||
Land | 1,259 | 1,694 | ||||||
Buildings | 83,293 | 71,900 | ||||||
Machinery and equipment | 124,019 | 104,436 | ||||||
208,571 | 178,030 | |||||||
Accumulated depreciation | 100,048 | 97,624 | ||||||
Property, plant and equipment — net | 108,523 | 80,406 | ||||||
Deferred income taxes | 864 | 6,883 | ||||||
Other | 8,637 | 9,983 | ||||||
$ | 249,424 | $ | 231,538 | |||||
See notes to consolidated financial statements.
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December 31, | ||||||||
2009 | 2008 | |||||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 8,972 | $ | 15,878 | ||||
Short-term debt | 15,000 | — | ||||||
Payroll and related liabilities | 6,909 | 7,442 | ||||||
Commissions payable | 4,348 | 5,246 | ||||||
Accrued expenses | 5,098 | 4,641 | ||||||
Accrued postretirement and medical benefits | 2,848 | 2,362 | ||||||
Total current liabilities | 43,175 | 35,569 | ||||||
Retirement benefits | 5,044 | 11,421 | ||||||
Postretirement benefits | 22,270 | 24,020 | ||||||
Deferred and other income taxes | 1,323 | 1,322 | ||||||
Equity: | ||||||||
Common shares, without par value: | ||||||||
Authorized — 35,000,000 shares; | ||||||||
Outstanding — 16,710,535 shares in 2009 and 16,707,535 shares in 2008 (after deducting treasury shares of 601,683 in 2009 and 604,683 in 2008) at stated capital amount | 5,100 | 5,099 | ||||||
Retained earnings | 182,875 | 171,312 | ||||||
Accumulated other comprehensive loss | (11,070 | ) | (17,823 | ) | ||||
The Gorman-Rupp Company shareholders’ equity | 176,905 | 158,588 | ||||||
Noncontrolling interest | 707 | 618 | ||||||
Total equity | 177,612 | 159,206 | ||||||
$ | 249,424 | $ | 231,538 | |||||
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Consolidated Statements of Equity
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
Common | Retained | Comprehensive | Noncontrolling | |||||||||||||||||
(Thousands of dollars, except per share amounts) | Shares | Earnings | Income (Loss) | Interest | Total | |||||||||||||||
Balances January 1, 2007 | $ | 5,097 | $ | 135,268 | $ | (12,223 | ) | $ | — | $ | 128,142 | |||||||||
Adoption of FASB Interpretation No. 48 | (253 | ) | (253 | ) | ||||||||||||||||
Acquired noncontrolling interest | 472 | 472 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||
Net income | 22,859 | 18 | 22,877 | |||||||||||||||||
Foreign currency translation adjustments | 2,252 | 30 | 2,282 | |||||||||||||||||
Pension and OPEB adjustments (net of income tax expense of $343) | 2,846 | 2,846 | ||||||||||||||||||
Total comprehensive income | — | 22,859 | 5,098 | 48 | 28,005 | |||||||||||||||
Issuance of 3,000 treasury shares | 1 | 96 | 97 | |||||||||||||||||
Cash dividends — $0.388 a share | (6,503 | ) | (6,503 | ) | ||||||||||||||||
Balances December 31, 2007 | 5,098 | 151,467 | (7,125 | ) | 520 | 149,960 | ||||||||||||||
Change in Pension and OPEB measurement date | (837 | ) | (837 | ) | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||
Net income | 27,197 | 140 | 27,337 | |||||||||||||||||
Foreign currency translation adjustments | (3,117 | ) | (42 | ) | (3,159 | ) | ||||||||||||||
Pension and OPEB adjustments (net of income tax benefit of $4,864) | (7,581 | ) | (7,581 | ) | ||||||||||||||||
Total comprehensive income (loss) | — | 27,197 | (10,698 | ) | 98 | 16,597 | ||||||||||||||
Issuance of 4,500 treasury shares | 1 | 167 | 168 | |||||||||||||||||
Cash dividends — $0.400 a share | (6,682 | ) | (6,682 | ) | ||||||||||||||||
Balances December 31, 2008 | 5,099 | 171,312 | (17,823 | ) | 618 | 159,206 | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||
Net income | 18,269 | 75 | 18,344 | |||||||||||||||||
Foreign currency translation adjustments | 1,750 | 14 | 1,764 | |||||||||||||||||
Pension and OPEB adjustments (net of income tax expense of $2,831) | 5,003 | 5,003 | ||||||||||||||||||
Total comprehensive income | — | 18,269 | 6,753 | 89 | 25,111 | |||||||||||||||
Issuance of 3,000 treasury shares | 1 | 61 | 62 | |||||||||||||||||
Cash dividends — $0.405 a share | (6,767 | ) | (6,767 | ) | ||||||||||||||||
Balances December 31, 2009 | $ | 5,100 | $ | 182,875 | $ | (11,070 | ) | $ | 707 | $ | 177,612 | |||||||||
See notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
Year ended December 31, | ||||||||||||
(Thousands of dollars) | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 18,269 | $ | 27,197 | $ | 22,859 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 8,955 | 7,848 | 7,597 | |||||||||
Deferred income taxes | 4,776 | (2,154 | ) | 2,490 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 10,961 | (944 | ) | (1,103 | ) | |||||||
Inventories | 14,979 | (3,658 | ) | (1,773 | ) | |||||||
Accounts payable | (6,906 | ) | 1,716 | 3,376 | ||||||||
Commissions payable | (898 | ) | 238 | 833 | ||||||||
Income taxes | 698 | (1,762 | ) | 570 | ||||||||
Pension benefits | (3,248 | ) | 2,429 | (2,475 | ) | |||||||
Other | 742 | (2,606 | ) | (9 | ) | |||||||
Proceeds from insured loss | 1,305 | 1,093 | 2,470 | |||||||||
Net cash provided by operating activities | 49,633 | 29,397 | 34,835 | |||||||||
Cash flows from investing activities: | ||||||||||||
Capital additions — net | (38,071 | ) | (27,909 | ) | (12,826 | ) | ||||||
Proceeds from insured loss | 95 | 428 | 530 | |||||||||
(Purchases) redemption of short-term investments | (1,500 | ) | 5,586 | (1,385 | ) | |||||||
Proceeds from sale of product line | 1,420 | — | — | |||||||||
Payment for acquisition | — | — | (3,693 | ) | ||||||||
Net cash used for investing activities | (38,056 | ) | (21,895 | ) | (17,374 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Cash dividends | (6,767 | ) | (6,682 | ) | (6,503 | ) | ||||||
Proceeds from bank borrowings | 24,806 | — | — | |||||||||
Payments to bank for borrowings | (9,806 | ) | — | — | ||||||||
Net cash provided by (used for) financing activities | 8,233 | (6,682 | ) | (6,503 | ) | |||||||
Effect of exchange rate changes on cash | 800 | (1,631 | ) | 992 | ||||||||
Net increase (decrease) in cash and cash equivalents | 20,610 | (811 | ) | 11,950 | ||||||||
Cash and cash equivalents: | ||||||||||||
Beginning of year | 23,793 | 24,604 | 12,654 | |||||||||
End of year | $ | 44,403 | $ | 23,793 | $ | 24,604 | ||||||
See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
(Amounts in tables in thousands of dollars)
(Amounts in tables in thousands of dollars)
Note A — Summary of Major Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Earnings per share are calculated based on the weighted-average number of common shares outstanding.
Cash Equivalents and Short-Term Investments
The Company considers highly liquid instruments with maturities of 90 days or less to be cash equivalents. The Company periodically makes short-term investments for which cost approximates fair value. Short term investments at December 31, 2009 consist of certificates of deposit.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at the historical carrying amount net of allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts for estimated losses from the failure of its customers to make required payments for products delivered. The Company estimates this allowance based on knowledge of the financial condition of customers, review of historical receivables and reserve trends, and other pertinent information.
Inventories
Inventories are stated at the lower of cost or market. The costs for approximately 90% of inventories at December 31, 2009 and 92% at December 31, 2008 are determined using the last-in, first-out (LIFO) method, with the remainder determined using the first-in, first-out method. Cost components include materials, inbound freight costs, labor and an appropriate proportion of fixed and variable overheads, on an absorption costing basis.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost. Repairs and maintenance costs are expensed as incurred. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets and is included in cost of products sold and selling, general and administrative expenses, as appropriate.
The estimated useful life generally ranges from 20 to 50 years for buildings and 5 to 15 years for machinery and equipment. Software is amortized over 3 to 5 years. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. Impairment losses are recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts.
Goodwill and Intangibles
Goodwill recognized in connection with business acquisitions is not amortized to expense. Goodwill is tested annually for impairment as of October 1 each year, or whenever events or changes in circumstances indicate there may be a possible permanent loss of value. The Company completed its annual impairment test for goodwill as of October 1 of each year presented using discounted cash flow and other valuation techniques. These tests confirmed that the fair value of the Company’s reporting units exceeds their respective carrying values and that no impairment loss was required to be recognized in 2009 or for any prior periods.
Goodwill is tested for impairment at the reporting unit level and is based on the net assets for each reporting unit, including goodwill and intangible assets. A discounted cash flow model is used to estimate the fair value of each reporting unit, which considers forecasted cash flows discounted at an estimated weighted-average cost of capital. The forecasted cash flows are based on the Company’s long-term operating plan and the weighted-average cost of capital is an estimate of the overall after-tax rate of return. Other valuation techniques including comparative market multiples are used when appropriate. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units.
Amortization of other intangible assets is calculated on the straight-line basis using the following lives:
Sales contracts | 18 years | |||
Drawings | 15 years | |||
Program logic | 10 years | |||
Customer relationships | 9 years | |||
Non-compete agreements | 2-3 years |
Revenue Recognition
Revenue from product sales is recognized when the risks and rewards of ownership and title pass, which usually occurs upon shipment to the customer.
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Concentration of Credit Risk
The Company does not require collateral from its customers and has a good collection history. There were no sales to a single customer that exceeded 10% of total net sales for the years ended December 31, 2009, 2008 or 2007.
Shipping and Handling Costs
The Company classifies all amounts billed to customers for shipping and handling as revenue and reflects shipping and handling costs in cost of products sold.
Advertising
The Company expenses all advertising costs as incurred, which for the years ended December 31, 2009, 2008 and 2007 totaled $2.7 million, $3.6 million, and $3.2 million, respectively.
Product Warranties
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:
2009 | 2008 | |||||||
Balance at beginning of year | $ | 2,048 | $ | 1,682 | ||||
Warranty costs accrued | 1,915 | 3,231 | ||||||
Expenses | (2,100 | ) | (2,865 | ) | ||||
Balance at end of year | $ | 1,863 | $ | 2,048 | ||||
Foreign Currency Translation
Assets and liabilities of the Company’s operations outside the United States which are accounted for in a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates. Revenues and expenses are translated at weighted-average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss) within shareholders’ equity.
Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in net income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
In 2009, the Company adopted the revised standard which changes the accounting and reporting for minority interests. The new guidance requires minority interest to be recharacterized as noncontrolling interests and classified as a component of equity. The Company has a 10% noncontrolling interest in its investment in Gorman-Rupp Europe B.V. As a result of the adoption of this standard, prior period amounts of noncontrolling interest were reclassified to stockholders’ equity to conform to the current period presentation. Income attributable to noncontrolling interest is not material and is therefore not presented separately in the consolidated statements of income, but rather is included in other expense. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows.
In 2009, the Company adopted the new guidance which requires employers to disclose additional information about fair value measurements of employee benefit plan assets. Specifically, employers are required to disclose information about how investment allocation decisions are made, the fair value of each major category of employee benefit plan assets and information about the inputs and valuation techniques used to develop the fair value measurements of employee benefit plan assets. Refer to Note G — Pensions and Other Postretirement Benefits.
In 2009, the Company adopted the new subsequent events standard, as amended, which established general guidance for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company has evaluated subsequent events through the date the financial statements were issued, noting no events that require adjustment of, or disclosure in, the consolidated financial statements for the period ended December 31, 2009.
25
Notes to ConsolidatedFinancial Statements — Continued
In 2009, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FAS No. 162,which establishes the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP). FAS 168 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws as authoritative GAAP for SEC registrants. Pursuant to the provisions of the Codification, the Company has updated references to U.S. GAAP in these consolidated financial statements. The adoption of the Codification did not have an effect on the Company’s financial position, results of operations or cash flows.
Note B — Allowance for Doubtful Accounts
The allowance for doubtful accounts was $507,000 and $484,000 at December 31, 2009 and 2008, respectively.
Note C — Inventories
The excess of replacement cost over LIFO cost is approximately $47.6 million and $49.8 million at December 31, 2009 and 2008, respectively. Replacement cost approximates current cost. Some inventory quantities were reduced during 2009 and 2008 resulting in liquidation of some LIFO quantities carried at lower costs from earlier years versus current year costs. The related effect increased net income by $1.9 million in 2009 ($.12 per share) and $907,000 ($0.05 per share) in 2008. Reserves for excess and obsolete inventory totaled $2.2 million and $2.3 million at December 31, 2009 and 2008, respectively.
Note D — Financing Arrangements
Under an unsecured bank loan agreement which matures in November 2010, the Company may borrow up to $15.0 million with interest at LIBOR plus .75%, adjustable and payable monthly. At December 31, 2009, $15.0 million was outstanding against this agreement to partially finance the consolidation and expansion of the Company’s Mansfield, Ohio manufacturing and office facilities which were substantially completed in 2009.
Under an unsecured bank line of credit which matures in November 2010, the Company may borrow up to $20.0 million with interest at LIBOR plus .75% or at alternative rates as selected by the Company. At December 31, 2009, $19.6 million were available for borrowing after deducting $400,000 for outstanding letters of credit.
The Company also has a $6.0 million unsecured bank line of credit which matures in May 2010. At December 31, 2009, $2.6 million were available for borrowing after deducting $3.4 million for letters of credit. Interest is payable quarterly at LIBOR plus .55% to 1.0% or at alternative rates as selected by the Company.
The financing arrangements described above contain restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios. At December 31, 2009, the Company was in compliance with all requirements.
Interest expense which approximates interest paid, was $170,000, $45,000 and $49,000 in 2009, 2008 and 2007, respectively. Additionally, interest capitalized as part of the Mansfield, Ohio construction project in 2009 totaled $109,000.
The Company has operating leases for certain offices, manufacturing facilities, land, office equipment and automobiles. Rental expenses relating to operating leases were $741,000, $762,000 and $691,000 in 2009, 2008 and 2007, respectively. The future minimum lease payments due under these operating leases are:
Less | More | |||||||||||||||||||
than 1 | 1-3 | 3-5 | than 5 | |||||||||||||||||
Total | Year | Years | Years | Years | ||||||||||||||||
Operating leases | $ | 3,763 | $ | 519 | $ | 884 | $ | 792 | $ | 1,568 |
Note E — Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss as reported in the Consolidated Balance Sheets are:
2009 | 2008 | |||||||
Foreign currency translation adjustments | $ | 675 | $ | (1,075 | ) | |||
Pension and OPEB adjustments (net of income tax benefits of $7,544 in 2009 and $10,375 in 2008) | (11,745 | ) | (16,748 | ) | ||||
$ | (11,070 | ) | $ | (17,823 | ) | |||
Note F — Income Taxes
The components of income before income taxes are:
2009 | 2008 | 2007 | ||||||||||
United States | $ | 25,213 | $ | 35,939 | $ | 33,243 | ||||||
Foreign countries | 2,042 | 4,555 | 2,140 | |||||||||
$ | 27,255 | $ | 40,494 | $ | 35,383 | |||||||
26
The components of income tax expense are as follows:
2009 | 2008 | 2007 | ||||||||||
Current expense: | ||||||||||||
Federal | $ | 4,975 | $ | 8,945 | $ | 10,347 | ||||||
Foreign | 734 | 1,173 | 713 | |||||||||
State and local | 644 | 504 | 1,153 | |||||||||
6,353 | 10,622 | 12,213 | ||||||||||
Deferred expense (credit): | ||||||||||||
Federal | 2,961 | 2,668 | 225 | |||||||||
Foreign | (142 | ) | (288 | ) | (15 | ) | ||||||
State and local | (186 | ) | 295 | 101 | ||||||||
2,633 | 2,675 | 311 | ||||||||||
Income tax expense | $ | 8,986 | $ | 13,297 | $ | 12,524 | ||||||
The reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes is as follows:
2009 | 2008 | 2007 | ||||||||||
Income taxes at statutory rate | $ | 9,539 | $ | 14,173 | $ | 12,384 | ||||||
State and local income taxes, net of federal tax benefit | 298 | 519 | 815 | |||||||||
Tax credits | (300 | ) | (1,232 | ) | (350 | ) | ||||||
IRC Section 199 | (216 | ) | (551 | ) | (508 | ) | ||||||
Dividend received from foreign subsidiary | — | 884 | — | |||||||||
Lower foreign taxes differential | (261 | ) | (709 | ) | — | |||||||
Other | (74 | ) | 213 | 183 | ||||||||
Income tax expense | $ | 8,986 | $ | 13,297 | $ | 12,524 | ||||||
Deferred tax assets and liabilities consist of:
2009 | 2008 | 2007 | ||||||||||
Deferred tax assets: | ||||||||||||
Inventories | $ | 806 | $ | — | $ | — | ||||||
Accrued liabilities | 1,775 | 2,192 | 2,140 | |||||||||
Postretirement health | ||||||||||||
benefits obligation | 7,793 | 8,527 | 9,663 | |||||||||
Accrued pension | 305 | 2,632 | — | |||||||||
Other | 1,745 | 864 | 823 | |||||||||
Total deferred tax assets | 12,424 | 14,215 | 12,626 | |||||||||
Deferred tax liabilities: | ||||||||||||
Inventories | — | 736 | 244 | |||||||||
Depreciation and amortization | 9,579 | 5,857 | 6,074 | |||||||||
Accrued pension | — | — | 840 | |||||||||
Total deferred tax liabilities | 9,579 | 6,593 | 7,158 | |||||||||
Net deferred tax assets | $ | 2,845 | $ | 7,622 | $ | 5,468 | ||||||
The Company made income tax payments of $6.1 million, $10.8 million and $8.9 million in 2009, 2008 and 2007, respectively.
At December 31, 2009, total unrecognized tax benefits were $1.5 million. Of the total, $876,000, if ultimately recognized, would reduce the Company’s annual effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year | $ | 870 | $ | 844 | $ | 987 | ||||||
Additions based on tax positions related to the current year | 110 | 174 | 242 | |||||||||
Additions (reductions) for tax positions of prior years | 665 | (1 | ) | (204 | ) | |||||||
Reductions due to lapse of applicable statue of limitations | (184 | ) | (47 | ) | (4 | ) | ||||||
Settlements | — | (100 | ) | (177 | ) | |||||||
Balance at end of year | $ | 1,461 | $ | 870 | $ | 844 | ||||||
The Company is subject to income taxes in the U.S. federal and various state, local and foreign jurisdictions. Income tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2005. The Company is currently under examination by the Canadian Revenue Agency for tax years ending 2004 – 2006. Management has filed a Competent Authority relief request with both U.S. and Canadian tax authorities to eliminate a double tax treatment dispute. Under the most recent U.S.-Canadian tax protocol, Competent Authority assessments should achieve symmetry under binding arbitration. Any adjustment resulting from Competent Authority resolution of the examination will not have a material impact on the financial position of the Company.
The statutes of limitations in taxing jurisdictions expire in varying periods. The Company has an unrecognized tax benefit of $61,000 which will be recognized if the relevant statute of limitations expires in the next 12 months without the relevant taxing authority examining the applicable return.
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Notes to Consolidated Financial Statements — Continued
The Company has not provided an estimate for any U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries that might be payable if these earnings were repatriated since the Company considers these amounts to be permanently invested.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense for all periods presented. The Company accrued approximately $391,000 and $201,000 for the payment of interest and penalties at December 31, 2009 and 2008, respectively.
Note G — Pensions and Other Postretirement Benefits
The Company sponsors a defined benefit pension plan covering substantially all employees. Additionally, the Company sponsors a defined contribution pension plan at one location not participating in the defined benefit pension plan.
A 401(k) plan that includes a partial Company match is also available. For substantially all United States employees hired after January 1, 2008, an enhanced 401(k) plan is available instead of the Company’s defined benefit pension plan. Benefits are based on age and years of service. Employees hired prior to January 1, 2008 were not affected by the change.
Total contributions for the defined contribution pension plan and the 401(k) plan in 2009, 2008 and 2007 were $867,000, $932,000 and $821,000, respectively.
The Company also sponsors a non-contributory defined benefit health care plan that provides health benefits to substantially all retirees and their spouses. The Company funds the cost of these benefits as incurred. For measurement purposes, a zero percent annual rate of increase in the per capita cost of covered health care benefits for retirees age 65 and over was assumed for 2009 and is expected to remain constant going forward.
The Company fully recognizes the obligations associated with its defined benefit pension plan and defined benefit healthcare plan in its financial statements.
The following table presents the plans’ funded status as of the measurement date reconciled with amounts recognized in the Company’s consolidated balance sheets:
Pension | Postretirement | |||||||||||||||
Benefits | Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Accumulated benefit obligation at end of year | $ | 48,123 | $ | 44,672 | $ | 23,919 | $ | 25,578 | ||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation at beginning of year | $ | 55,497 | $ | 51,977 | $ | 25,577 | $ | 28,372 | ||||||||
Service cost | 2,752 | 3,073 | 1,213 | 1,187 | ||||||||||||
Interest cost | 3,403 | 3,567 | 1,580 | 1,654 | ||||||||||||
Measurement date change | — | — | — | 474 | ||||||||||||
Benefits paid | (5,554 | ) | (2,902 | ) | (1,394 | ) | (1,113 | ) | ||||||||
Effect of foreign exchange | — | — | 103 | (143 | ) | |||||||||||
Actuarial (gain) or loss | 4,315 | (218 | ) | (3,160 | ) | (4,853 | ) | |||||||||
Benefit obligation at end of year | 60,413 | 55,497 | $ | 23,919 | $ | 25,578 | ||||||||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year | 44,076 | 54,188 | $ | — | $ | — | ||||||||||
Actual return on plan assets | 10,647 | (13,410 | ) | — | — | |||||||||||
Employer contributions | 6,200 | 6,200 | 1,394 | 1,113 | ||||||||||||
Benefits paid | (5,554 | ) | (2,902 | ) | (1,394 | ) | (1,113 | ) | ||||||||
Fair value of plan assets at end of year | 55,369 | 44,076 | $ | — | $ | — | ||||||||||
Funded status at end of year | $ | (5,044 | ) | $ | (11,421 | ) | ||||||||||
Amounts recognized in the statement of financial position consist of: | ||||||||||||||||
Current liabilities | $ | — | $ | — | $ | (1,649 | ) | $ | (1,558 | ) | ||||||
Noncurrent liabilities | (5,044 | ) | (11,421 | ) | (22,270 | ) | (24,020 | ) | ||||||||
$ | (5,044 | ) | $ | (11,421 | ) | $ | (23,919 | ) | $ | (25,578 | ) | |||||
Amounts recognized in accumulated other comprehensive income consist of: | ||||||||||||||||
Net actuarial (gain) or loss | $ | 26,826 | $ | 31,730 | $ | (7,537 | ) | $ | (4,607 | ) | ||||||
Deferred tax (benefit) charge | (10,408 | ) | (12,182 | ) | 2,864 | 1,807 | ||||||||||
After tax actuarial (gain) or loss | $ | 16,418 | $ | 19,548 | $ | (4,673 | ) | $ | (2,800 | ) | ||||||
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Pension | Postretirement | |||||||||||||||
Benefits | Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Components of net periodic benefit cost: | ||||||||||||||||
Service cost | $ | 2,752 | $ | 3,073 | $ | 1,213 | $ | 1,187 | ||||||||
Interest cost | 3,403 | 3,567 | 1,580 | 1,654 | ||||||||||||
Expected return on plan assets | (3,536 | ) | (4,893 | ) | — | — | ||||||||||
Recognized actuarial (gain) or loss | 2,107 | 794 | (225 | ) | — | |||||||||||
Net periodic benefit cost | $ | 4,726 | $ | 2,541 | $ | 2,568 | $ | 2,841 | ||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income are: | ||||||||||||||||
Net loss (gain) | (4,903 | ) | 17,290 | (3,160 | ) | (4,847 | ) | |||||||||
Total income (loss) recognized in net periodic benefit cost and other comprehensive income | $ | (177 | ) | $ | 19,831 | $ | (592 | ) | $ | (2,006 | ) | |||||
The prior service cost is amortized on a straight line basis over the average remaining service period of active participants. The gain or loss in excess of the greater of 10% of the benefit obligation or the market related value of assets is amortized on a straight line basis over the average remaining service period of active participants.
Pension | Postretirement | |||||||||||||||
Benefits | Benefits | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted-average assumptions used to determine benefit obligations: | ||||||||||||||||
Discount rate | 5.60 | % | 6.30 | % | 5.50 | % | 6.40 | % | ||||||||
Rate of compensation increase | 3.50 | % | 3.50 | % | — | — | ||||||||||
Weighted-average assumptions used to determine net periodic benefit cost: | ||||||||||||||||
Discount rate | 6.30 | % | 6.10 | % | 6.40 | % | 6.10 | % | ||||||||
Expected long-term rate of return on plan assets | 8.00 | % | 8.00 | % | — | — | ||||||||||
Rate of compensation increase | 3.50 | % | 3.50 | % | — | — |
The assumption used for the rate of increase in medical costs over the next five years was essentially unchanged in 2009 from 2008. The health-care cost trend rate assumption has a significant effect on the amounts reported. For example, a one-percentage point change in the assumed health care cost trend rate would have the following effects:
One-Percentage Point | ||||||||
Increase | Decrease | |||||||
Effect on total of service and interest cost components in 2009 | $ | 234 | $ | (212 | ) | |||
Effect on accumulated postretirement benefit obligation as of December 31, 2009 | 1,582 | (1,528 | ) |
The investment return of the Pension Plan is measured against those of a target portfolio consisting of 60% equities, 35% fixed income securities, and 5% cash equivalents of domestic corporations. Equities (including all convertible securities) may comprise up to 70% of the Pension Plan’s market value, with a minimum requirement of 20%. Fixed income/floating rate securities (including preferred stocks and cash equivalents) should not exceed 80% of the Pension Plan’s market value and may represent as little as 30%. Cash equivalents (including all senior debt securities with less than one year to maturity) may comprise up to 40% of the market value. Non-U.S. corporate securities may comprise up to 35% of the Pension Plan’s market value. The long term growth rate of the Plan is the CPI plus 3%.
Financial instruments included in pension plan assets are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:
Level 1 — Unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date for identical assets and liabilities.
Level 2 — Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs for the asset or liability (i.e., supported by little or no market activity). Level 3 inputs include management’s own assessments about the assumptions that market participants would use in pricing assets or liabilities (including assumptions about risk).
The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measure in its entirety.
29
Notes to Consolidated Financial Statements — Continued
The following table sets forth by level, within the fair value hierarchy, the Plan’s assets carried at fair value at December 31, 2009:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Total assets at fair value (all mutual funds) | $ | 55,369 | $ | — | $ | — | $ | 55,369 | ||||||||
Pension | ||||||||
Benefits | ||||||||
2009 | 2008 | |||||||
Asset allocation: | ||||||||
Asset category: | ||||||||
U.S. equity | $ | 15,219 | $ | 9,762 | ||||
Non-U.S. equity | 4,719 | 2,912 | ||||||
Balanced | 8,531 | 5,912 | ||||||
U.S. fixed income | 24,578 | 21,989 | ||||||
Cash and cash equivalents | 2,322 | 3,502 | ||||||
Total fair value of plan assets | $ | 55,369 | $ | 44,077 | ||||
Target asset allocation: | ||||||||
Equity securities | 20-70 | % | 20-70 | % | ||||
Debt securities | 30-80 | % | 30-80 | % |
Contributions
The Company expects to contribute approximately $6.0 million to its pension plan in 2010.
Expected future benefit payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||||
Pension | $ | 4,203 | $ | 3,996 | $ | 5,616 | $ | 6,041 | $ | 6,014 | $ | 31,652 | ||||||||||||
Postretirement | 1,694 | 1,734 | 1,743 | 1,783 | 1,907 | 11,372 |
Note H — Business Segment Information
The Company operates principally in one business segment: the design, manufacture and sale of pumps and related fluid control equipment for water, wastewater, construction, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilation and air conditioning (HVAC), military and other liquid-handling applications. The Company’s pumps are marketed in the United States and Canada through a network of more than 1,000 distributors, through manufacturers’ representatives (for sales to many original equipment manufacturers), through third-party distributor catalogs, and by direct sales. International sales are made primarily through foreign distributors and representatives. The Company sells to more than 100 countries around the world. The components of customer sales, determined based on the location of customers, are as follows:
2009 | % | 2008 | % | 2007 | % | |||||||||||||||||||
United States | $ | 169,844 | 64 | $ | 227,423 | 69 | $ | 217,444 | 71 | |||||||||||||||
Foreign countries | 96,398 | 36 | 103,223 | 31 | 88,118 | 29 | ||||||||||||||||||
Total | $ | 266,242 | 100 | $ | 330,646 | 100 | $ | 305,562 | 100 | |||||||||||||||
Note I — Other Assets
The major components of other assets are as follows:
December 31, | ||||||||
2009 | 2008 | |||||||
Goodwill | $ | 4,798 | $ | 4,798 | ||||
Intangibles: | ||||||||
Trade names | 1,020 | 1,020 | ||||||
Drawings | 1,400 | 1,400 | ||||||
Customer relationships | 874 | 874 | ||||||
Non-compete agreements | 709 | 704 | ||||||
Other intangibles | 687 | 689 | ||||||
Total intangibles | 4,690 | 4,687 | ||||||
Less-accumulated amortization | (2,240 | ) | (1,862 | ) | ||||
Net intangibles | 2,450 | 2,825 | ||||||
Other assets | 1,389 | 2,360 | ||||||
Total | $ | 8,637 | $ | 9,983 | ||||
30
Note J — Flood Insurance Recoveries
The Company maintains insurance coverage, including flood insurance, which provides for reimbursement of losses resulting from property damage, loss of product and business interruption.
In August 2007, the Company’s Mansfield Division assembly facility was damaged by flooding. As of December 31, 2008, the Company incurred costs and damages related to the flood of $5.0 million, all of which were reimbursed, less a $500,000 insurance deductible. These costs included the write-off of inventory and long-lived assets, repair of the property damage and other clean-up costs. The Company maintains replacement value insurance coverage, including flood insurance, which provides for reimbursement of losses resulting from property damage, loss of product and business interruption.
In September 2009, the Company’s Patterson Pump Company subsidiary was damaged by flooding. As of December 31, 2009, the Company incurred costs and damages related to the flood of $2.3 million, less a $50,000 insurance deductible. As of December 31, 2009, the Company received partial reimbursement payments of $1.4 million and recorded a receivable of $834,000 for the remaining insurance recoveries which were received in 2010.
31
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations 2009 Compared to 2008:
The Company recorded net sales of $266.3 million in 2009 compared to record net sales of $330.7 million in 2008, a decrease of $64.4 million or 19.5%. The decline in net sales principally resulted from the severe global recession which negatively impacted sales in most of the markets the Company serves.
The most significant declines in net sales were in the fire protection market of $20.4 million primarily due to the decrease in commercial construction activity, the construction market of $17.0 million and the wastewater market of $14.2 million primarily due to infrastructure related projects being halted in anticipation of federal stimulus funding. Partially offsetting these decreases was an increase of custom pump sales of $4.0 million related to flood control projects.
International sales amounted to $96.4 million in 2009 compared to $103.2 million in 2008, a decrease of $6.8 million, representing a 6.6% decrease from 2008 levels due primarily to the global economic downturn. The related decline in the value of the U.S. dollar helped keep international sales from declining as much as domestic sales. International sales represented 36% and 31% of total sales for the Company in 2009 and 2008, respectively.
The backlog of orders at December 31, 2009 was $93.7 million compared to $107.8 million at December 31, 2008, a decrease of $14.1 million or 13.1%. The backlog decreased primarily due to a lessening of orders in the original equipment market. Substantially all of the current backlog of orders is expected to ship during 2010.
Cost of products sold in 2009 was $204.5 million compared to $253.6 million in 2008, a decrease of $49.1 million or 19.4%. The decrease in cost of products sold was primarily due to lower sales volume, including a $6.8 million decrease in LIFO expense due to reduced inventory levels resulting in partial liquidation of LIFO quantities. Manufacturing costs included decreases in compensation and payroll taxes of $7.0 million and supplies, patterns and tooling of $1.8 million primarily due to lower production levels. Also, warranty expense decreased $1.3 million due to estimates related to lower sales volume and claims experience and profit sharing expense decreased $1.0 million related to lower operating income. Partially offsetting these decreases is increased pension expense of $1.6 million resulting from the significant market value declines in the worldwide equity markets in 2008 which resulted in higher pension expense in 2009. As a percent of net sales, cost of products sold was 76.8% in 2009 compared to 76.7% in 2008. Gross profit was $61.8 million in 2009 compared to $77.1 million in 2008, a decrease of 19.8%. As a percent of net sales, gross profit was 23.2% and 23.3% in 2009 and 2008, respectively.
Selling, general and administrative (SG&A) expenses in 2009 were $35.4 million compared to $38.1 million in 2008, a decrease of $2.7 million. The decrease in SG&A expenses is principally due to lower advertising and travel expenses of $1.6 million and supplies of $418,000 as the previous year included expenses related to the Construction Expo and IFAT trade shows held every three years. In addition, the level of these expenses was curtailed in 2009 due to the economic downturn. Professional services decreased $532,000 primarily due to additional expenses in 2008 relating to computer system upgrades. Compensation and payroll taxes decreased $361,000 principally due to reduced headcount and temporary wage reductions. Partially offsetting these decreases are increases in pension expense of $913,000 resulting from the significant market value declines in the worldwide equity markets in 2008 and in healthcare expense of $217,000 due to increased medical claims and higher medical costs. As a percent of net sales, SG&A expenses were 13.3% during 2009 and 11.5% in 2008.
Other income in 2009 was $1.2 million compared to $2.1 million in 2008, a decrease of $900,000 or 42.9%. Interest income decreased $827,000 primarily due to a decline in interest rates.
Other expense was $347,000 and $607,000 in 2009 and 2008, respectively. The change was primarily due to reduced foreign currency exchange rate losses related to the increase in the value of the Euro and Canadian dollar in relation to the U.S. dollar.
The effective income tax rate was 33.0% in 2009 compared to 32.8% in 2008.
Net income for 2009 was $18.3 million compared to a record $27.2 million in 2008, a decrease of $8.9 million or 32.7%. As a percent of net sales, net income was 6.9% and 8.2% in 2009 and 2008, respectively.
Earnings per share were $1.09 in 2009 compared to $1.63 in 2008, a decrease of $0.54 per share.
Results of Operations 2008 Compared to 2007:
The Company achieved record net sales of $330.7 million in 2008 compared to the previous record of $305.6 million set in 2007, an increase of $25.1 million or 8.2%. The record level of net sales reflected the continued growth in the Company’s core business of fluid-handling applications.
32
Sales of fire pumps for the international market contributed to the strong 2008 results, increasing by over $17 million, offsetting the decline in custom pump shipments from 2007 levels that included the shipment of pumps to New Orleans for a flood control project. Fabrication of components for the original equipment market increased by $9.5 million from 2007 levels. Sales at Gorman-Rupp Europe B.V. increased by $3.5 million reflecting the inclusion of the full year results of Gorman-Rupp Europe, acquired in April, 2007.
International sales amounted to $103.2 million in 2008 compared to $88.1 million in 2007, an increase of $15.1 million, representing a 17.1% increase from 2007 levels. This increase is primarily the result of an increased focus on international growth by the Company and strong global economics. International sales represented 31% and 29% of total sales for the Company in 2008 and 2007, respectively.
The backlog of orders at December 31, 2008 was $107.8 million compared to $116.4 million at December 31, 2007, a decrease of $8.6 million or 7.4%. The backlog decreased primarily as a result of a fourth quarter economic slowdown in orders.
Cost of products sold in 2008 was $253.6 million compared to $238.1 million in 2007, an increase of $15.5 million or 6.5%. As a percent of net sales, cost of products sold was 76.7% in 2008 compared to 77.9% in 2007. The 1.2 percentage point reduction in cost of products sold primarily related to efficiencies on increased volume at the Company’s principal manufacturing facilities. Increases in material costs of $12.1 million, factory supplies of $984,000, and production labor costs and benefits of $819,000 were incurred to support the increase in sales volume. Additional depreciation expense of $656,000 was incurred due to previous years’ investments in machinery, and profit sharing expense increased $489,000 due to higher operating income levels. Gross profit was $77.1 million in 2008 compared to $67.5 million in 2007, an increase of 14.2%. As a percent of net sales, gross profit was 23.3% and 22.1% in 2008 and 2007, respectively.
SG&A expenses in 2008 were $38.1 million compared to $34.6 million in 2007, an increase of $3.5 million. As a percent of net sales, SG&A expenses were 11.5% during 2008 and 11.3% in 2007. Compensation increased $1.0 million as a result of additional staffing due to growth and normal compensation increases. Profit sharing expense increased $479,000 in relation to higher operating income levels. Advertising costs increased $470,000 due to costs associated with the Construction-Exposition Trade Show held once every three years. Travel expenses increased $380,000 due to the trade show and additional travel resulting from the increased sales volume. Computer system upgrades resulted in an increase in professional fees of $300,000.
Other income in 2008 was $2.1 million compared to $2.6 million in 2007, a decrease of $500,000 or 19.2%. Interest income decreased $545,000 as the result of lower cash balances invested during the year and lower interest rates.
Other expense was $607,000 and $76,000 in 2008 and 2007, respectively. The increase was primarily due to foreign currency exchange rate losses related to the decrease in the value of the Euro and Canadian dollar in relation to the U.S. dollar.
The effective income tax rate was 32.8% in 2008 compared to 35.4% in 2007, a decrease of 2.6 percentage points. The lower effective tax rate in 2008 was primarily due to the benefit from tax credits and lower foreign taxes differential.
Net income for 2008 was a record $27.2 million compared to $22.9 million in 2007, an increase of $4.3 million or 18.8%. As a percent of net sales, net income was 8.2% and 7.5% in 2008 and 2007, respectively.
Earnings per share were $1.63 in 2008 compared to $1.37 in 2007, an increase of $0.26 per share.
Cash dividends paid on common shares increased $0.012 per share during 2008 to $0.40 per share and marked the 36th consecutive year of increased cash dividends. The dividend yield at December 31, 2008 was 1.3%.
Trends
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 with a letter of credit.
For more than 10 years, numerous business entities in the pump and fluid-handling industries, as well as a multitude of companies in many other industries, have been targeted in a series of lawsuits in several jurisdictions by various individuals seeking redress to claimed injury as a result of the entities’ alleged use of asbestos in their products. The Company and three of its subsidiaries remain drawn into mass-scale asbestos-related litigation, typically as one of hundreds of co-defendants in a particular proceeding; the vast majority of these cases are against Patterson Pump Company. The allegations in the lawsuits involving the Company and/or its subsidiaries are vague, general and speculative, and most cases have not advanced beyond the early stage of discovery. In certain situations, the plaintiffs have voluntarily dismissed the Company and/or its subsidiaries from some of the lawsuits after the plaintiffs have acknowledged that there is no basis for their claims. In other situations, the Company and/or its subsidiaries have been dismissed from some of the lawsuits as a result of court rulings in favor of motions to dismiss and/or motions for summary judgment. In thirty-two cases, the Company and/or its subsidiaries have entered into nominal economic settlements recommended and paid for by insurers, coupled with dismissal of the lawsuits. Insurers of the Company have engaged legal counsel to represent the Company and its subsidiaries and to protect their interests.
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued
Management does not currently believe that the small number of legal proceedings arising out of the ordinary course of business, or the industry-wide asbestos litigation, will materially impact the Company’s results of operations, liquidity or financial condition.
Liquidity and Sources of Capital
Cash equivalents and short-term investments totaled $45.9 million and there was $15.0 million in bank debt at December 31, 2009. In addition, the Company had $22.2 million available in bank lines of credit after deducting $3.8 million in outstanding letters of credit. The Company was in compliance with all restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios at December 31, 2009.
Capital expenditures for 2010, consisting principally of machinery and equipment, are estimated to be $5 to $7 million. They are expected to be financed through internally generated funds and existing lines of credit. During 2009, 2008 and 2007, the Company financed its capital improvements and working capital requirements principally through internally generated funds, proceeds from short-term investments and proceeds from a bank loan agreement.
Cash provided by operating activities was $49.6 million, $29.4 million and $34.8 million in 2009, 2008 and 2007, respectively. In 2009, additional cash was generated principally due to lower inventory and accounts receivable balances.
Cash used for investing activities was $38.0 million, $21.9 million and $17.4 million for 2009, 2008 and 2007, respectively. The Company substantially completed construction of the second phase of the consolidation and expansion of its primary manufacturing facility in Mansfield, Ohio. Approximately $54.6 million has been expended for the construction project ($3.4 million less than approved); $30.7 million in 2009, $21.5 million in 2008 and $2.4 million in 2007.
Cash provided by (used for) financing activities was $8.2 million in 2009, ($6.7) million in 2008 and ($6.5) million in 2007. The increase in cash provided in 2009 was due to a net $15.0 million of proceeds from bank borrowings during the year which were used to partially finance the construction project in Mansfield. The remaining $15.0 million of borrowings is expected to be paid back by the end of the third quarter 2010.
On October 22, 2009, the Board of Directors authorized an increase in the payment of quarterly dividends on common stock to $0.105 per share, representing a 5% increase over the dividend paid in the previous quarter and marking the 37th consecutive year of increased dividends. The dividend yield at December 31, 2009 was 1.5%.
The changes in foreign currency translation against the U.S. dollar increased cash by $800,000 in 2009, decreased cash by $1.6 million in 2008 and increased cash by $992,000 in 2007. The increase in 2009 is primarily due to the increase in the value of the Euro and the Canadian dollar compared to the U.S. dollar.
The ratio of current assets to current liabilities was 3.0 to 1 and 3.8 to 1 at December 31, 2009 and 2008, respectively. Management believes that the Company has adequate working capital and financing capabilities, resulting in a healthy, flexible liquidity position.
Critical Accounting Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstances. Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates.
In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions pertaining to the accounting policies described below.
Revenue Recognition
Substantially all of the Company’s revenues from product sales are recognized when all of the following criteria are met: persuasive evidence of a sale arrangement exists, the price is fixed or determinable, product delivery has occurred or services have been rendered, there are no further obligations to customers, and collectibility is probable. Product delivery occurs when the risks and rewards of ownership and title pass, which usually occurs upon shipment to the customer.
34
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to the Company (e.g., bankruptcy filings, substantial down-grading of credit scores, etc.), the Company records a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes allowances for bad debts based on the length of time the receivables are past due. If circumstances change (e.g., an unexpected material adverse change in a major customer’s ability to meet its financial obligations), the Company’s estimates of the recoverability of amounts due could be reduced by a material amount. Historically, the Company’s collection history has been good.
Inventories and Related Allowance
Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on a variety of factors, including historical inventory usage and management evaluations. Historically, the Company has not experienced large write-offs due to obsolescence. The Company uses the last-in, first-out (LIFO) method for primarily all of its inventories.
Pension Plans and Other Postretirement Benefit Plans
The Company fully recognizes the obligations associated with its defined benefit pension plan and defined benefit health-care plan in its financial statements.
The measurement of liabilities related to pension plans and other postretirement benefit plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, compensation increases and health-care cost trend rates. The Company uses a measurement date of December 31 for benefit plan determinations. The discount rates used to determine the present value of future benefits are based on estimated yields of investment grade fixed income investments. The discount rate used to value pension plan obligations was 5.60% and 6.30% in 2009 and 2008, respectively. The discount rate used to value postretirement obligations was 5.50% and 6.30% at December 31, 2009 and 2008, respectively. The expected rate of return on pension assets is designed to be a long-term assumption that will be subject to year-to-year variability. The rate for 2009 and 2008 was 8.00%. Actual pension plan asset performance will either reduce or increase unamortized losses which will ultimately affect net income. The assumed rate of compensation increase was 3.50% in 2009 and 2008.
The assumption used for the rate of increase in medical costs over the next five years was essentially unchanged in 2009 from 2008.
The overall effect of changes noted in the above assumptions will increase (decrease) pension and postretirement expenses.
Income Taxes
The basic principles related to accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.
Realization of the Company’s deferred tax assets is principally dependent upon the Company’s achievement of projected future taxable income, which management believes will be sufficient to fully utilize the deferred tax assets recorded.
Goodwill and Other Intangibles
The Company accounts for goodwill in a purchase business combination as the excess of the cost over the fair value of net assets acquired. Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives. Goodwill is tested for impairment at the reporting unit level on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows. No reporting unit was at risk of failing the impairment test in 2009 or any prior periods.
Other Matters
Transactions with related parties are in the ordinary course of business and are not material to the Company’s financial position, net income or cash flows. The Company does not have any off-balance sheet arrangements, financings or other relationships with unconsolidated “special purpose entities.” Also, the Company is not a party to any long-term debt agreements, or any material capital leases, operating leases or purchase obligations.
35
Report of Management on Internal Controlover Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as defined in Exchange Act rules 13(a) — 15(f )). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, Management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2009.
The independent registered public accounting firm of Ernst & Young LLP issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. This report is included on the following page.
/s/ JEFFERY S. GORMAN
Jeffrey S. Gorman
President and Chief Executive Officer
President and Chief Executive Officer
/s/ WAYNE L. KNABEL
Wayne L. Knabel
Chief Financial Officer
Chief Financial Officer
March 5, 2010
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Report of Independent Registered Public AccountingFirm on Internal Control over Financial Reporting
The Board of Directors and Shareholders of
The Gorman-Rupp Company
The Gorman-Rupp Company
We have audited The Gorman-Rupp Company’s internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Gorman-Rupp Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Gorman-Rupp Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Gorman-Rupp Company as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2009 of The Gorman-Rupp Company and our report dated March 5, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 5, 2010
March 5, 2010
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Eleven-Year Summary of Selected Financial Data
(Thousands of dollars, except per share amounts)
(Thousands of dollars, except per share amounts)
2009 | 2008 | 2007 | 2006 | |||||||||||||
Operating Results: | ||||||||||||||||
Net sales | $ | 266,242 | $ | 330,646 | $ | 305,562 | $ | 270,910 | ||||||||
Gross profit | 61,773 | 77,089 | 67,452 | 58,676 | ||||||||||||
Income taxes | 8,986 | 13,297 | 12,524 | 8,654 | ||||||||||||
Net income | 18,269 | 27,197 | 22,859 | 19,072 | ||||||||||||
Depreciation and amortization | 8,955 | 7,848 | 7,597 | 6,688 | ||||||||||||
Interest expense | 170 | 45 | 49 | 41 | ||||||||||||
Return on net sales (%) | 6.9 | 8.2 | 7.5 | 7.0 | ||||||||||||
Sales dollars per employee | 264.1 | 302.5 | 286.9 | 258.3 | ||||||||||||
Income dollars per employee | 18.1 | 24.9 | 21.5 | 18.2 | ||||||||||||
Financial Position: | ||||||||||||||||
Current assets | $ | 131,400 | $ | 134,266 | $ | 135,288 | $ | 120,118 | ||||||||
Current liabilities | 43,175 | 35,569 | 33,481 | 27,646 | ||||||||||||
Working capital | 88,225 | 98,697 | 101,807 | 92,472 | ||||||||||||
Current ratio | 3.0 | 3.8 | 4.0 | 4.3 | ||||||||||||
Property, plant and equipment — net | $ | 108,523 | $ | 80,406 | $ | 59,970 | $ | 52,351 | ||||||||
Capital additions | 38,071 | 27,909 | 12,826 | 7,258 | ||||||||||||
Total assets | 249,424 | 231,538 | 211,534 | 187,540 | ||||||||||||
Long-term debt | — | — | — | — | ||||||||||||
Equity | 177,612 | 159,206 | 149,960 | 128,142 | ||||||||||||
Dividends paid | 6,767 | 6,682 | 6,503 | 6,126 | ||||||||||||
Average number of employees | 1,008 | 1,093 | 1,065 | 1,049 | ||||||||||||
Shareholder Information: | ||||||||||||||||
Earnings per share | $ | 1.09 | $ | 1.63 | $ | 1.37 | $ | 1.14 | ||||||||
Cash dividends per share | 0.405 | 0.400 | 0.388 | 0.365 | ||||||||||||
Equity per share at December 31 | 10.63 | 9.53 | 8.98 | 7.67 | ||||||||||||
Average number of shares outstanding | 16,709,047 | 16,705,210 | 16,701,175 | 16,696,962 |
Summary of Quarterly Results of Operations
(Thousands of dollars, except per share amounts)
(Thousands of dollars, except per share amounts)
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2009 and 2008:
Earnings | ||||||||||||||||
Quarter Ended 2009 | Net Sales | Gross Profit | Net Income | per Share | ||||||||||||
First quarter | $ | 71,598 | $ | 15,345 | $ | 4,506 | $ | 0.27 | ||||||||
Second quarter | 68,345 | 15,790 | 4,867 | 0.29 | ||||||||||||
Third quarter | 64,096 | 16,100 | 5,177 | 0.31 | ||||||||||||
Fourth quarter | 62,203 | 14,538 | 3,719 | 0.22 | ||||||||||||
Total | $ | 266,242 | $ | 61,773 | $ | 18,269 | $ | 1.09 | ||||||||
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2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||
$ | 231,249 | $ | 203,554 | $ | 195,826 | $ | 195,081 | $ | 203,169 | $ | 190,384 | $ | 182,239 | |||||||||||||
47,071 | 42,425 | 41,851 | 41,451 | 48,108 | 48,430 | 46,347 | ||||||||||||||||||||
6,235 | 5,075 | 4,613 | 5,267 | 8,450 | 8,400 | 8,460 | ||||||||||||||||||||
10,903 | 9,277 | 9,787 | 8,936 | 14,585 | 13,796 | 13,081 | ||||||||||||||||||||
6,808 | 7,179 | 7,274 | 7,035 | 7,128 | 6,863 | 6,489 | ||||||||||||||||||||
25 | 40 | 56 | 72 | 116 | 183 | 55 | ||||||||||||||||||||
4.7 | 4.6 | 5.0 | 4.6 | 7.2 | 7.2 | 7.2 | ||||||||||||||||||||
233.3 | 211.4 | 196.4 | 185.1 | 195.2 | 186.5 | 177.6 | ||||||||||||||||||||
11.0 | 9.6 | 9.8 | 8.5 | 14.0 | 13.5 | 12.7 | ||||||||||||||||||||
$ | 110,501 | $ | 96,974 | $ | 95,718 | $ | 85,315 | $ | 90,575 | $ | 83,745 | $ | 79,641 | |||||||||||||
28,219 | 21,112 | 21,908 | 19,282 | 18,103 | 19,079 | 17,439 | ||||||||||||||||||||
82,282 | 75,862 | 73,810 | 66,033 | 72,472 | 64,666 | 62,202 | ||||||||||||||||||||
3.9 | 4.6 | 4.4 | 4.4 | 5.0 | 4.4 | 4.6 | ||||||||||||||||||||
$ | 51,505 | $ | 54,812 | $ | 54,338 | $ | 57,757 | $ | 53,895 | $ | 57,885 | $ | 53,609 | |||||||||||||
3,189 | 7,500 | 3,698 | 5,765 | 3,139 | 11,439 | 16,182 | ||||||||||||||||||||
179,541 | 165,673 | 162,395 | 154,302 | 149,569 | 147,337 | 138,331 | ||||||||||||||||||||
— | — | — | 291 | — | 3,413 | 3,107 | ||||||||||||||||||||
127,048 | 121,898 | 117,918 | 112,912 | 109,366 | 101,455 | 93,751 | ||||||||||||||||||||
5,983 | 5,907 | 5,809 | 5,550 | 5,475 | 5,322 | 5,152 | ||||||||||||||||||||
991 | 963 | 997 | 1,054 | 1,041 | 1,021 | 1,026 | ||||||||||||||||||||
$ | 0.66 | $ | 0.55 | $ | 0.58 | $ | 0.54 | $ | 0.87 | $ | 0.82 | $ | 0.78 | |||||||||||||
0.358 | 0.354 | 0.348 | 0.333 | 0.328 | 0.318 | 0.307 | ||||||||||||||||||||
7.61 | 7.30 | 7.07 | 6.77 | 6.55 | 6.05 | 5.59 | ||||||||||||||||||||
16,692,273 | 16,686,997 | 16,681,146 | 16,675,287 | 16,708,026 | 16,761,442 | 16,766,702 |
Earnings | ||||||||||||||||
Quarter Ended 2008 | Net Sales | Gross Profit | Net Income | per Share | ||||||||||||
First quarter | $ | 81,434 | $ | 19,844 | $ | 7,152 | $ | 0.43 | ||||||||
Second quarter | 84,031 | 20,406 | 7,895 | 0.47 | ||||||||||||
Third quarter | 84,188 | 20,172 | 7,385 | 0.44 | ||||||||||||
Fourth quarter | 80,993 | 16,667 | 4,765 | 0.29 | ||||||||||||
Total | $ | 330,646 | $ | 77,089 | $ | 27,197 | $ | 1.63 | ||||||||
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Shareholder Information
![](https://capedge.com/proxy/10-K/0000950123-10-021646/c97192c9719201.gif)
Set forth above is a line graph comparing the yearly percentage change in the cumulative total shareholder return, including reinvested cash dividends, on the Company’s Common Shares against the cumulative total return of the NYSE Amex Exchange Index and a Peer Group Index for the period of five fiscal years commencing January 1, 2005 and ending December 31, 2009. The issuers in the Peer Group Index were selected on a line-of-business basis by reference to SIC Code 3561—Pumps and Pumping Equipment. The Peer Group Index is composed of the following issuers: Ampco-Pittsburgh Corp., Colfax Corp., Flowserve Corp., Graco Inc., Idex Corp., Pentair Inc., Robbins & Myers Inc. and Roper Industries Inc.
Ranges of Stock Prices
The high and low sales price and dividends per share for common shares traded on the NYSE Amex Exchange were:
Sales Price of Common Shares | ||||||||||||||||||||||||
2009 | 2008 | Dividends Per Share | ||||||||||||||||||||||
High | Low | High | Low | 2009 | 2008 | |||||||||||||||||||
First quarter | $ | 32.60 | $ | 14.50 | $ | 34.60 | $ | 25.65 | $ | .100 | $ | .100 | ||||||||||||
Second quarter | 23.96 | 18.72 | 45.38 | 30.60 | .100 | .100 | ||||||||||||||||||
Third quarter | 26.48 | 18.44 | 45.85 | 35.50 | .100 | .100 | ||||||||||||||||||
Fourth quarter | 29.79 | 22.37 | 38.91 | 18.25 | .105 | .100 |
Shareholder information reported by Transfer Agent and Registrar, Computershare Investor Services, LLC, February 19, 2010:
Holders | Shares | |||||||
Individuals | 1,566 | 2,711,101 | ||||||
Nominees, brokers and others | 123 | 13,999,434 | ||||||
Total | 1,689 | 16,710,535 | ||||||
An additional 601,683 common shares are held in Treasury.
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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 Annual Report contains various forward-looking statements and includes 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, 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 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.
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