EX-13 3 l92981aex13.txt EXHIBIT 13 Exhibit 13 THE GORMAN-RUPP COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS' EQUITY
(Thousands of dollars, except per share amounts) YEAR ENDED DECEMBER 31, INCOME 2001 2000 1999 ---------- ---------- ---------- Net sales $ 202,927 $ 190,144 $ 181,945 Other income 886 1,340 881 ---------- ---------- ---------- TOTAL INCOME 203,813 191,484 182,826 Deductions from income: Cost of products sold 154,819 141,714 135,598 Selling, general and administrative expenses 25,959 26,431 25,687 Non-recurring expense - plant relocation - 1,143 - ---------- ---------- ---------- 180,778 169,288 161,285 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 23,035 22,196 21,541 Income taxes 8,450 8,400 8,460 ---------- ---------- ---------- NET INCOME $ 14,585 $ 13,796 $ 13,081 ========== ========== ========== BASIC AND DILUTED EARNINGS PER SHARE $ 1.70 $ 1.61 $ 1.52 ========== ========== ========== Average number of shares outstanding 8,555,830 8,583,183 8,585,877
SHAREHOLDERS' EQUITY ACCUMULATED OTHER COMMON RETAINED COMPREHENSIVE SHARES EARNINGS INCOME (LOSS) TOTAL ------ -------- ------------- ----- BALANCES DECEMBER 31, 1998 $ 5,116 $ 80,314 $ (1,724) $ 83,706 Comprehensive income: Net income 13,081 13,081 Foreign currency translation adjustments 487 487 --------- Total comprehensive income 13,568 Sale of 35,813 common shares from treasury 23 550 573 Purchase of 25,000 common shares for treasury (16) (384) (400) Cash dividends - $.60 a share (5,152) (5,152) --------- --------- --------- --------- BALANCES DECEMBER 31, 1999 5,123 88,409 (1,237) 92,295 Comprehensive income: Net income 13,796 13,796 Foreign currency translation adjustments (287) (287) --------- Total comprehensive income 13,509 Sale of 3,000 common shares from treasury 2 45 47 Purchase of 29,496 common shares for treasury (19) (511) (530) Cash dividends - $.62 a share (5,322) (5,322) --------- --------- --------- --------- BALANCES DECEMBER 31, 2000 5,106 96,417 (1,524) 99,999 Comprehensive income: Net income 14,585 14,585 Foreign currency translation adjustments (486) (486) --------- Total comprehensive income 14,099 Sale of 3,000 common shares from treasury 2 71 73 Purchase of 31,000 common shares for treasury (21) (765) (786) Cash dividends - $.64 a share (5,475) (5,475) --------- --------- --------- --------- BALANCES DECEMBER 31, 2001 $ 5,087 $ 104,833 $ (2,010) $ 107,910 ========= ========= ========= =========
10 See notes to consolidated financial statements. THE GORMAN-RUPP COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Thousands of dollars) DECEMBER 31, ASSETS 2001 2000 --------- --------- CURRENT ASSETS Cash and cash equivalents $ 20,583 $ 7,630 Accounts receivable 28,378 28,851 Inventories 33,889 39,760 Deferred income taxes 4,249 4,789 Other current assets 2,020 1,259 --------- --------- TOTAL CURRENT ASSETS 89,119 82,289 OTHER ASSETS 2,280 1,593 DEFERRED INCOME TAXES 2,819 4,114 PROPERTY, PLANT AND EQUIPMENT Land 1,592 1,592 Buildings 43,070 42,573 Machinery and equipment 73,787 73,157 --------- --------- 118,449 117,322 Less allowances for depreciation 64,554 59,437 --------- --------- PROPERTY, PLANT AND EQUIPMENT - NET 53,895 57,885 --------- --------- $ 148,113 $ 145,881 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 5,433 $ 7,391 Payrolls and related liabilities 3,377 3,331 Commissions payable 3,389 2,532 Accrued expenses 2,955 2,621 Accrued medical benefits 2,949 2,604 Current portion of long-term debt - 600 --------- --------- TOTAL CURRENT LIABILITIES 18,103 19,079 LONG-TERM DEBT - 3,413 POSTRETIREMENT BENEFITS 22,100 23,390 SHAREHOLDERS' EQUITY Common Shares, without par value: Authorized - 14,000,000 shares; Outstanding - 8,537,553 shares in 2001 and 8,565,553 shares in 2000 (after deducting treasury shares of 327,623 in 2001 and 299,623 in 2000) at stated capital amount 5,087 5,106 Retained earnings 104,833 96,417 Accumulated other comprehensive loss (translation adjustments) (2,010) (1,524) --------- --------- TOTAL SHAREHOLDERS' EQUITY 107,910 99,999 --------- --------- $ 148,113 $ 145,881 ========= =========
See notes to consolidated financial statements. 11 THE GORMAN-RUPP COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, (Thousands of dollars) 2001 2000 1999 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,585 $ 13,796 $ 13,081 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,128 6,863 6,489 Deferred income taxes 1,835 661 (977) Changes in operating assets and liabilities: Accounts receivable 473 (953) (1,616) Inventories 5,871 (3,571) 2,134 Accounts payable (1,958) 1,586 (2,861) Postretirement benefits (1,490) (1,057) (494) Other (151) (996) 1,755 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 26,293 16,329 17,511 CASH FLOWS FROM INVESTING ACTIVITIES: Capital additions, net (3,139) (11,439) (16,182) Purchases of short-term investments (2,000) (7,204) (13,502) Proceeds from short-term investments 2,000 10,429 16,583 Other - 300 - -------- -------- -------- NET CASH USED FOR INVESTING ACTIVITIES (3,139) (7,914) (13,101) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends (5,475) (5,322) (5,152) Proceeds from bank borrowings 2,495 17,119 29,430 Payments to bank for borrowings (6,508) (16,213) (27,106) Sale of common shares from treasury 73 47 573 Purchase of common shares for treasury (786) (530) (400) -------- -------- -------- NET CASH USED FOR FINANCING ACTIVITIES (10,201) (4,899) (2,655) -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 12,953 3,516 1,755 CASH AND CASH EQUIVALENTS: Beginning of year 7,630 4,114 2,359 -------- -------- -------- END OF YEAR $ 20,583 $ 7,630 $ 4,114 ======== ======== ========
12 See notes to consolidated financial statements. THE GORMAN-RUPP COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF MAJOR ACCOUNTING POLICIES: CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: The Company considers highly liquid, short-term investments to be cash equivalents. INVENTORIES: Inventories are stated at the lower of cost or market. The cost for approximately 96% of inventories at December 31, 2001 and 2000 is determined using the last-in, first-out (LIFO) method, with the remainder determined using the first-in, first-out method. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated on the basis of cost. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. The estimated useful life ranges from 20 to 50 years for buildings and 5 to 10 years for machinery and equipment. Long-lived assets are reviewed for impairment losses whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. CONCENTRATION OF CREDIT RISK: The Company does not require collateral from its customers and has generally had a good collection history. In 2001, sales to one customer were approximately 16.7% of total net sales and at December 31, 2001, 6.3% of total accounts receivable were due from this one customer. In 2000 and 1999 there were no sales to any customer greater than 10% of net sales. FREIGHT COSTS: The Company reflects the cost for shipping its products to customers in cost of products sold. REVENUE RECOGNITION: Revenue from product sales is generally recognized when shipment to the customer has been made, which is when title passes. ADVERTISING: The Company expenses all advertising costs as incurred which, for the years ended December 31, 2001, 2000 and 1999 totaled $2,519,000, $2,968,000 and $2,748,000 respectively. 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 June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will adopt the new rules on accounting for goodwill and other tangible assets beginning in the first quarter of 2002. The Company has determined there will be no effect on the earnings and financial position of the Company upon adoption. In October 2001, the FASB issued statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Statement No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company will adopt the new rules on accounting for the impairment and disposal of long-lived assets beginning in the first quarter of 2002. The Company is currently reviewing this statement to determine the effect on the Company's financial statements. TRANSLATION OF FOREIGN CURRENCY: Assets and liabilities of the Company's operations outside the United States, 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 average exchange rates effective during the year. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive (loss) income within shareholders' equity. Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in net income. NOTE B - INVENTORIES: The major components of inventories are as follows: -------------------------------------------------------------------------------- (Thousands of dollars) 2001 2000 -------------------------------------------------------------------------------- Raw materials and in-process $22,224 $25,898 Finished parts 9,700 11,148 Finished products 1,965 2,714 ------- ------- $33,889 $39,760 ======= ======= -------------------------------------------------------------------------------- The excess of replacement cost over LIFO cost is approximately $25,113,000 and $24,014,000 at December 31, 2001 and 2000, respectively. NOTE C - FINANCING ARRANGEMENTS: Under unsecured demand lines of credit with banks, the Company may borrow up to $10.0 million with interest at LIBOR plus .75% or at alternative rates as selected by the Company and $300,000 with interest at 7.5 percent. At December 31, 2001, $10.3 million was available for borrowing. In 1999, the Company negotiated an additional unsecured $20.0 million credit facility at a fixed rate of interest of 6.0%, to finance the construction of a new manufacturing complex. The note permitted the Company to draw funds and required interest-only payments through March 31, 2001 and then converted to a term loan requiring interest and principal payments through March 31, 2006. In connection with the conversion of the credit facility to a term loan on March 21, 2001, the Company classified $600,000 of the $4.0 million balance outstanding at December 31, 2000 as current. In 2001 the Company paid the outstanding balance of the term loan and subsequently terminated the loan. On January 3, 2002, the Company negotiated an additional unsecured $16.0 million credit facility with interest at LIBOR plus .75%, or at alternate rates as selected by the Company. The Company had an $8.0 million unsecured revolving loan agreement that matured in May 2001 and was renewed as a $4.0 million unsecured revolving loan agreement which matures in May 2003. At December 31, 2001, $3.0 million was available for borrowing after deducting $1.0 million of letters of credit. Interest is payable quarterly at LIBOR plus .55%, or at alternative rates as selected by the Company (weighted average interest rate of 2.7% and 7.2% at December 31, 2001 and 2000, respectively.) The $10.0 million demand line of credit and the $4.0 million revolving loan agreements contain restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios. At December 31, 2001 the Company significantly exceeds the requirements. Interest expense was $116,000, $183,000 (net of $25,000 capitalized interest), and $55,000 (net of $100,000 capitalized interest) in 2001, 2000 and 1999, respectively. 13 THE GORMAN-RUPP COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D - INCOME TAXES: The components of income before income taxes are: -------------------------------------------------------------------------------- (Thousands of dollars) 2001 2000 1999 -------------------------------------------------------------------------------- United States $22,456 $22,002 $21,480 Foreign 579 194 61 ------- ------- ------- $23,035 $22,196 $21,541 ======= ======= ======= -------------------------------------------------------------------------------- The components of income tax expense are as follows: -------------------------------------------------------------------------------- (Thousands of dollars) 2001 2000 1999 -------------------------------------------------------------------------------- Current expense: Federal $ 5,306 $ 6,484 $ 7,861 Canadian 306 332 259 State and local 1,003 923 1,317 ------- ------- ------- 6,615 7,739 9,437 Deferred expense (credit) Federal 1,723 640 (837) Canadian (123) (67) (26) State and local 235 88 (114) ------- ------- ------- 1,835 661 (977) ------- ------- ------- $ 8,450 $ 8,400 $ 8,460 ======= ======= ======= -------------------------------------------------------------------------------- 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: -------------------------------------------------------------------------------- (Thousands of dollars) 2001 2000 1999 -------------------------------------------------------------------------------- Income taxes at statutory rate $ 8,062 $ 7,769 $ 7,539 State and local income taxes, net of federal tax benefit 773 694 798 Other (385) (63) 123 ------- ------- ------- $ 8,450 $ 8,400 $ 8,460 ======= ======= ======= -------------------------------------------------------------------------------- Deferred tax assets (liabilities) consist of the following: -------------------------------------------------------------------------------- (Thousands of dollars) 2001 2000 1999 -------------------------------------------------------------------------------- Current: Inventories $ 1,430 $ 2,089 $ 2,445 Accrued liabilities 2,819 2,700 2,753 ------- ------- ------- 4,249 4,789 5,198 Non-current: Depreciation (5,651) (5,501) (5,439) Postretirement health benefits obligation 8,725 9,718 9,846 Other (255) (103) (41) ------- ------- ------- 2,819 4,114 4,366 ------- ------- ------- $ 7,068 $ 8,903 $ 9,564 ======= ======= ======= The Company made income tax payments of $7,223,000, $8,849,000, and $9,300,000 in 2001, 2000 and 1999, respectively. NOTE E - PENSIONS AND OTHER POSTRETIREMENT BENEFITS: The Company sponsors a defined benefit pension plan covering substantially all employees. The Company's policy is to fund the maximum tax-deductible contribution. The Company also sponsors a non-contributory defined benefit health care plan that provides health benefits to retirees and their spouses. The Company's policy is to fund the cost of these benefits as incurred. The following table presents the plans' funded status reconciled with amounts recognized in the Company's balance sheets:
------------------------------------------------------------------------------------- PENSION BENEFITS OTHER BENEFITS ------------------------------------------------------------------------------------- (Thousands of dollars) 2001 2000 2001 2000 -------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 26,343 $ 23,735 $ 16,280 $ 15,894 Service cost 1,339 1,251 602 582 Interest cost 2,071 1,739 1,262 1,232 Actuarial loss/(gain) 2,804 451 2,042 (391) Benefits paid (2,640) (833) (1,537) (1,037) -------- -------- -------- -------- BENEFIT OBLIGATION AT END OF YEAR 29,917 26,343 18,649 16,280 CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 30,670 27,566 - - Actual return on plan assets (2,351) 2,529 - - Company contributions 1,420 1,408 1,537 1,037 Benefits paid (2,640) (833) (1,537) (1,037) -------- -------- -------- -------- Fair value of plan assets at end of year 27,099 30,670 - - -------- -------- -------- -------- Funded status of the plan (under) over funded (2,818) 4,327 (18,649) (16,280) Unrecognized net actuarial loss/(gain) 4,103 (3,566) (2,734) (5,132) Unrecognized net transition asset (174) (348) - - Unrecognized prior service cost - - (2,252) (3,008) -------- -------- -------- -------- PREPAID (ACCRUED) BENEFIT COST $ 1,111 $ 413 $(23,635) $(24,420) ======== ======== ======== ======== WEIGHTED-AVERAGE ASSUMPTIONS Discount rate 7.50% 8.00% 7.50% 8.00% Expected rate of return on plan assets 8.00% 8.00% - - Rate of compensation increase 4.00% 4.00% - -
14 THE GORMAN-RUPP COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Approximately $1,500,000 and $1,000,000 of the post-retirement benefit obligation has been classified as a current liability at December 31, 2001 and December 31, 2000, respectively. For measurement purposes, an 8.0 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 4.5 percent by 2006 and remain at that level thereafter.
-------------------------------------------------------------------------------------------------------- PENSION BENEFITS OTHER BENEFITS -------------------------------------------------------------------------------------------------------- (Thousands of dollars) 2001 2000 1999 2001 2000 1999 ------- ------- ------- ------- ------- ------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 1,339 $ 1,251 $ 1,481 $ 602 $ 582 $ 681 Interest cost 2,071 1,739 1,847 1,262 1,232 1,140 Expected return on plan assets (2,477) (2,104) (2,059) - - - Amortization of prior service cost and unrecognized gain (36) (42) 34 (756) (756) (756) Recognized net actuarial loss (174) (174) (174) (351) (340) (182) ------- ------- ------- ------- ------- ------- BENEFIT COST $ 723 $ 670 $ 1,129 $ 757 $ 718 $ 883 ======= ======= ======= ======= ======= ======= --------------------------------------------------------------------------------------------------------
The assumed health care trend rate has a significant effect on the amounts reported for other postretirement benefits. A one-percentage point change in the assumed health care cost trend rate would have the following effects:
-------------------------------------------------------------------------------------------------------- ONE-PERCENTAGE POINT -------------------------------------------------------------------------------------------------------- (Thousands of dollars) INCREASE DECREASE -------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components in 2001 $ 146 $ (131) Effect on accumulated postretirement benefit obligation as of December 31, 2001 $ 1,319 $(1,204) --------------------------------------------------------------------------------------------------------
NOTE F - BUSINESS SEGMENT INFORMATION: The Company operates principally in one business segment, the manufacture and sale of pumps and related fluid control equipment for water, wastewater, construction, industrial, petroleum, original equipment, agricultural, fire and military applications. Except for export sales, the Company's pumps are marketed in the United States and Canada through a network of about 1,000 distributors, through manufacturers' representatives (for sales to many original equipment manufacturers) and by direct sales. Export sales are principally made through foreign distributors and manufacturers' representatives. The Company exports to more than 75 countries around the world. The components of customer sales, based on the location of customers, are as follows:
----------------------------------------------------------------------------------------------------- (Thousands of dollars) 2001 % 2000 % 1999 % ----------------------------------------------------------------------------------------------------- United States $170,250 84 $153,104 81 $151,492 83 Exports to foreign countries 32,677 16 37,040 19 30,453 17 -------- --- -------- --- -------- --- TOTAL $202,927 100 $190,144 100 $181,945 100 ======== === ======== === ======== ===
NOTE G - SUBSEQUENT EVENTS (UNAUDITED): On February 26, 2002, the Company acquired all of the issued and outstanding stock of American Machine & Tool Co., Inc. ("AMT") for a cash purchase price of approximately $16.0 million. On March 1, 2002, the Company acquired all of the issued and outstanding stock of Flo-Pak, Inc. ("Flo-Pak") for a cash purchase price of approximately $6.5 million. The acquisitions were financed with cash from the Company's treasury and by a draw of $10.0 million on an unsecured credit facility established on January 3, 2002. The Company anticipates that its borrowings for the acquisitions will be repaid from internally generated funds. AMT, located in Royersford, Pennsylvania, is a developer and manufacturer of standard centrifugal pumps for industrial and commercial fluid-handling applications and had revenues of approximately $14.9 million for the fiscal year ended October 31, 2001. AMT will operate as a subsidiary of the Company. Flo-Pak, located in Atlanta, Georgia, is a manufacturer of designed pumping systems for the heating, ventilation and air-conditioning (HVAC) market and had revenues of approximately $11.0 million for the year ended December 31, 2001. Flo-Pak's operations will be merged into Patterson Pump Company, a subsidiary of Gorman-Rupp. 15 THE GORMAN-RUPP COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2001 COMPARED TO 2000 The Company recorded net sales of $202.9 million in 2001, a record that marks the 15th consecutive year of increased sales, and exceeded 2000 net sales of $190.1 million by 6.7 percent. Highlighting sales growth was the substantial increase in demand for fabricated components used in the gas turbine power generation industry combined with continued strong demand for pumps in the fire protection, fresh water and wastewater markets. Growth in these markets, together with price increases on products ranging from 2-3%, were partially offset by the economic downturn in 2001, reducing demand for small pumps made for the original equipment market and establishing flat demand for pumps distributed to other domestic commercial markets. In addition, international business declined as export shipments decreased nearly 12% in 2001, representing 16% of total net sales compared to 19% in 2000. However, the Company is not exposed to material market risks as a result of its export sales or its operations outside of the United States. Payment terms for export sales transacted by the Company consist of revocable and irrevocable letters of credit and open accounts; and payment terms regarding export shipments are made solely in U.S. Dollars. The Company's operations outside of the United States are small, both individually and collectively. Other income in 2001 totaled $886,000 and was principally the result of interest income on invested funds. Interest income was constrained, however, due to lower rates of return. Other income in 2000 was $1.3 million and included interest income and a gain from the sale of unutilized machinery and equipment recorded in the fourth quarter. Cost of products sold in 2001 equaled 76.3% of net sales and amounted to $154.8 million compared to 74.5% and $141.7 million in 2000. As a percent of net sales, gross profit margins were 23.7% in 2001 and 25.5% in 2000. Decreased gross margins resulted principally from the economic impact of higher energy costs, increased medical and healthcare expense and underutilized capacity primarily occurring after the September 11th terrorist attack and extending through the fourth quarter. The last half of 2001 presented different capacity utilization issues for the Company. While the Company's subsidiary in Georgia was responding to substantial increases in demand, two facilities in Ohio were experiencing order reductions and budget cutbacks. Cost control measures and on-going manufacturing efficiencies from prior investments assisted in maintaining the performance results for 2001. Selling, general and administrative (SG&A) expenses in 2001 were $26.0 million compared to $26.4 million in 2000, a decrease of 1.8 percent. As a percent of net sales, SG&A expenses were 12.8% and 13.9% in 2001 and 2000, respectively. Cost control reductions, principally in advertising and product promotion in the fourth quarter contributed to lower SG&A expense for the year. Interest expense included in SG&A expenses amounted to $116,000 in 2001 compared to $183,000 in 2000. The effective income tax rate was 36.7% in 2001, compared to 37.8% in 2000. Record net income for the 15th consecutive year increased 5.7% in 2001 to $14.6 million compared to $13.8 million in 2000. As a percent of net sales, net income was 7.2% and 7.3% in 2001 and 2000, respectively. Earnings per share increased nine cents to $1.70 in 2001 compared to $1.61 in 2000. Cash dividends paid on common shares equaled 64 cents per share and marked the 29th consecutive year of increased cash dividends. The yield at December 31, 2001 was 2.4 percent. TRENDS Numerous business entities in the pump and fluid-handling 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 two of its subsidiaries have been drawn into this mass-scaled litigation, typically as one of hundreds of co-defendants in a particular proceeding. The allegations in the lawsuits involving the Company and/or its subsidiaries are vague, general, and speculative, and the 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. Insurers of the Company have engaged legal counsel to represent the Company and its subsidiaries and to protect their interests. In addition, the Company and/or its subsidiaries are parties in a small number of legal proceedings arising out of the ordinary course of business. Management does not currently believe that these proceedings, or the industry-wide asbestos litigation, will materially impact the Company's results of operations, liquidity or financial condition. SUBSEQUENT EVENTS-ACQUISITIONS On February 26, 2002, the Company acquired all of the issued and outstanding stock of American Machine & Tool Co., Inc. ("AMT") for a cash purchase price of approximately $16.0 million. On March 1, 2002, the Company acquired all of the issued and outstanding stock of Flo-Pak, Inc. ("Flo-Pak") for a cash purchase price of approximately $6.5 million. The acquisitions were financed with cash from the Company's treasury and by a draw of $10.0 million on an unsecured credit facility established on January 3, 2002. The Company anticipates that its borrowings for the acquisitions will be repaid from internally generated funds. AMT, located in Royersford, Pennsylvania, is a developer and manufacturer of standard centrifugal pumps for industrial and commercial fluid-handling applications and had revenues of approximately $14.9 million for the fiscal year ended October 31, 2001. AMT will operate as a subsidiary of the Company. Flo-Pak, located in Atlanta, Georgia, is a manufacturer of designed pumping systems for the heating, ventilation and air-conditioning (HVAC) market and had revenues of approximately $11.0 million for the year ended December 31, 2001. Flo-Pak's operations will be merged into Patterson Pump Company, a subsidiary of Gorman-Rupp. 2000 COMPARED TO 1999 The Company recorded net sales of $190.1 million in 2000, marking a record for the 14th consecutive year and exceeded 1999 net sales of $181.9 million by 4.5 percent. Double-digit growth occurred in the wastewater and the original equipment markets. International business expanded as export shipments increased nearly 22% over 1999, representing 19% of total net sales. Growth in the original equipment market was principally a result of shipments of fabricated components used in the gas turbine power generation industry. The growth in these markets along with a general price increase of 2-3% was somewhat offset by an overall economic slowing of demand for pumps late in the year and a movement of deliveries of fabricated products from the fourth quarter 2000 into 2001. Other income totaled $1.3 million in 2000 compared to $881,000 in 1999, the increase resulting principally from interest income on invested funds and a gain recorded from the sale of unutilized machinery and equipment. Cost of products sold totaled $141.7 million in 2000 compared to $135.6 in 1999, equal to 74.5% of net sales in 2000 and 1999. Gross profit margins were $48.4 million in 2000 compared to $46.3 million in 1999. As a percent of net sales, gross profit margins were 25.5% in 2000 and 1999. On-going production efficiencies, from prior investments to update technology and machinery, and capacity utilization aided in offsetting manufacturing cost increases associated with general inflationary factors and production disruptions resulting from moving machinery and materials into a newly completed manufacturing facility. Selling, general and administrative (SG&A) expenses in 2000 were $26.4 million compared to $25.7 million in 1999, an increase of 2.9 percent. As a percent of net sales, SG&A expenses were 13.9% and 14.1% in 2000 and 1999, respectively. Utilization of fixed SG&A expenses incurred to generate product sales and lower pension and other postretirement expenses contributed toward the improved percentage to net sales. Interest expense amounted to $183,000 in 2000 compared to $55,000 in 1999 (net of $25,000 and $100,000 capitalized interest cost associated with the new facility construction project in 2000 and 1999, respectively). The Company recorded a non-recurring expense in 2000 associated with the moving of machines and materials into a newly completed manufacturing facility, resulting in a $1.1 million reduction in operating income. The move and expenses occurred principally in the third quarter 2000 and reduced after tax income for 2000 by $711,000 equal to earnings per share of $0.08. The effective income tax rate was 37.8% in 2000, compared to 39.3% in 1999. The lower effective tax rate principally resulted from reductions in state and local taxes. Record net income for the 14th consecutive year increased 5.5% in 2000 to $13.8 million compared to $13.1 million in 1999. As a percent of net sales, net income was 7.3% and 7.2% in 2000 and 1999, respectively. Earnings per share increased nine cents to $1.61 in 2000 compared to $1.52 in 1999. The 2000 cash dividend of 62 cents per common share was the 28th consecutive year cash dividends paid have increased. The yield at December 31, 2000 was 3.4 percent. LIQUIDITY AND SOURCES OF CAPITAL Cash and cash equivalents totaled $20.6 million and long-term debt was eliminated as of December 31, 2001. In addition, the Company had $10.3 million available in bank short-term lines of credit. An unsecured revolving credit facility that expired in May 2001 was renewed as a $4.0 million unsecured revolving loan agreement that matures in May 2003. As of December 31, 2001, $1.0 million of the revolving facility covered outstanding letters of credit. Although the $10.3 million credit facility and the $4.0 million revolving facility contain restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, the Company significantly exceeds the requirements. During 2001, the Company financed its capital improvements and working capital requirements principally through internally generated funds, including inventory reductions. Capital expenditures for 2002, estimated to be $9.0 to $13.0 million, are expected to be financed through internally generated funds and existing credit arrangements. During 2000 and 1999, the Company financed its capital improvements and working capital requirements principally through internally generated funds, proceeds from short-term investments and line of credit arrangements with banks. On January 3, 2002, the Company negotiated an additional unsecured $16.0 million credit facility from a bank with interest at LIBOR plus .75% or at alternate rates as selected by the Company. The Company drew $10.0 million on this facility to partially finance its two acquisitions completed in the first quarter of 2002. The ratio of current assets to current liabilities was 4.9 to 1 at December 31, 2001, compared to 4.3 to 1 at December 31, 2000. Management believes that it has adequate working capital and a healthy liquidity position. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will adopt the new rules on accounting for goodwill and other tangible assets beginning in the first quarter of 2002. The Company has determined there will be no effect on the earnings and financial position of the Company upon adoption. In October 2001, the FASB issued statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Statement No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company will adopt the new rules on accounting for the impairment and disposal of long-lived assets beginning in the first quarter of 2002. The Company is currently reviewing this statement to determine the effect on the Company's financial statements. CRITICAL ACCOUNTING POLICIES 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 Gorman-Rupp'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 Gorman-Rupp's revenues are recognized when products are shipped to unaffiliated customers. The Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101. 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 Gorman-Rupp (e.g., bankruptcy filings, substantial down-grading of credit scores), the Company records a specific reserve 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 reserves 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. 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 observations. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS Assumptions used in determining projected benefit obligations and the fair value of plan assets for the Company's pension plans and postretirement benefits other than pensions are evaluated periodically by Management and an outside actuary. Changes in assumptions are based on relevant Company data, such as the rate of increase in compensation levels and the long-term rate of return on plan assets. External factors such as the discount rate and health care cost projections are evaluated and updated annually. Critical assumptions affecting the estimate of pension and postretirement benefit costs are the actuary-determined discount rate and the expected long-term rate of return on plan assets. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Realization of the Company's deferred tax assets is principally dependent upon its achievement of projected future taxable income, which Management believes is sufficient to fully utilize the deferred tax assets recorded. OTHER MATTERS Transactions with related parties are in the ordinary course of business and are not material to Gorman-Rupp's financial position, net income or cash flows. Gorman-Rupp does not have off-balance sheet arrangements, financings or other relationships with unconsolidated "special purpose entities." 17 THE GORMAN-RUPP COMPANY AND SUBSIDIARIES TEN YEAR SUMMARY OF SELECTED FINANCIAL DATA (Thousands of dollars, except per share amounts) 2001 2000 1999 1998 ---- ---- ---- ---- OPERATING RESULTS: Net sales $ 202,927 $ 190,144 $ 181,945 $ 173,864 Gross profit 48,108 48,430 46,347 43,713 Income taxes 8,450 8,400 8,460 7,400 Income(1) 14,585 13,796 13,081 11,752 Depreciation and amortization 7,128 6,863 6,489 6,330 Interest expense 116 183 55 188 Return on net sales(%) 7.2 7.3 7.2 6.8 Sales dollars per employee 194.9 186.2 177.3 170.1 Income dollars per employee 14.0 13.5 12.7 11.5 FINANCIAL POSITION: Current assets $ 89,119 $ 82,289 $ 78,185 $ 78,556 Current liabilities 18,103 19,079 17,439 17,431 Working capital 71,016 63,210 60,746 61,125 Current ratio 4.9 4.3 4.5 4.5 Property, plant and equipment - net 53,895 57,885 53,609 43,916 Capital additions 3,139 11,439 16,182 9,327 Total assets 148,113 145,881 136,875 127,477 Long-term debt - 3,413 3,107 783 Shareholders' equity 107,910 99,999 92,295 83,706 Dividends paid 5,475 5,322 5,152 4,983 Average number of employees 1,041 1,021 1,026 1,022 SHAREHOLDER INFORMATION: Basic and diluted earnings per share(1) $ 1.70 $ 1.61 $ 1.52 $ 1.37 Cash dividends per share .64 .62 .60 .58 Shareholders' equity per share at December 31 12.64 11.67 10.74 9.75 Average number of shares outstanding 8,555,830 8,583,183 8,585,877 8,599,713 (1) Income in 1992 is before the cumulative effect of a change in accounting principle which reduced income by $11,886,000,or $1.38 per share. -------------------------------------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2001 and 2000. (Thousands of dollars, except per share amounts)
QUARTER ENDED 2001 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 TOTAL -------- -------- -------- -------- -------- Net sales $ 49,671 $ 54,838 $ 51,430 $ 46,988 $202,927 Gross profit 12,346 13,425 11,959 10,378 48,108 Net income 3,604 3,998 3,637 3,346 14,585 Basic and diluted earnings per share .42 .47 .42 .39 1.70 QUARTER ENDED 2000 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 TOTAL -------- -------- -------- -------- -------- Net sales $ 49,024 $ 48,008 $ 47,618 $ 45,494 $190,144 Gross profit 12,683 12,238 12,444 11,065 48,430 Net income 4,100 3,661 3,128 2,907 13,796 Basic and diluted earnings per share .48 .42 .37 .34 1.61
18
1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- $ 167,426 $ 157,549 $ 151,765 $ 139,601 $ 133,537 $ 127,937 40,964 39,127 36,516 35,763 32,699 30,975 6,340 5,735 5,590 5,625 5,063 4,693 10,612 9,928 9,461 9,327 8,795 7,966 5,959 5,675 5,173 4,534 4,274 4,025 238 330 602 195 58 213 6.3 6.3 6.2 6.7 6.6 6.2 163.5 161.8 156.1 140.6 136.0 127.6 10.4 10.2 9.7 9.4 9.0 7.9 $ 81,695 $ 71,926 $ 71,401 $ 60,070 $ 55,746 $ 50,152 17,036 15,199 19,727 16,391 14,382 12,380 64,659 56,727 51,674 43,679 41,364 37,772 4.8 4.7 3.6 3.7 3.9 4.1 40,919 40,549 42,163 40,879 36,835 30,807 6,329 4,036 8,229 8,553 10,277 4,496 127,865 117,650 119,816 107,100 98,706 86,434 6,689 3,796 7,188 4,715 5,338 668 78,060 72,737 67,240 61,608 56,911 52,759 4,821 4,567 4,466 4,209 4,122 3,923 1,024 974 972 993 982 1,003 $ 1.23 $ 1.15 $ 1.10 $ 1.09 $ 1.02 $ .92 .56 .53 .52 .49 .48 .46 9.07 8.44 7.81 7.18 6.63 6.14 8,609,479 8,617,168 8,587,466 8,579,633 8,588,493 8,594,255 -------------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders The Gorman-Rupp Company We have audited the accompanying consolidated balance sheets of The Gorman-Rupp Company and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001, appearing on pages 10 through 15. 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 auditing standards generally accepted in the 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Gorman-Rupp Company and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Cleveland, Ohio January 29, 2002 19 THE GORMAN-RUPP COMPANY AND SUBSIDIARIES SHAREHOLDER INFORMATION RANGES OF STOCK PRICES The high and low sales price and dividends per share for Common Shares traded on the American Stock Exchange were: SALES PRICE OF COMMON SHARES DIVIDENDS PER SHARE 2001 2000 2001 2000 ---------------- ----------------- ---- ----- QUARTER HIGH LOW HIGH LOW First $18.5000 $17.3750 $17.6250 $14.5000 $.16 $.15 Second 28.7500 18.0000 18.8750 15.2500 .16 .15 Third 26.3000 18.8000 19.0000 15.5000 .16 .16 Fourth 27.2500 19.2000 18.0000 15.0000 .16 .16 -------------------------------------------------------------------------------- Shareholder information reported by Transfer Agent and Registrar, National City Bank, February 22, 2002. Holders Shares ------- ------ Individuals 1,320 2,410,481 Nominees, Brokers and Others 24 6,127,072 ----- --------- TOTAL 1,344 8,537,553 ===== ========= An additional 327,623 Common Shares are held in Treasury. -------------------------------------------------------------------------------- 22 SAFE HARBOR 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 and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, The Gorman-Rupp Company provides the following cautionary statement identifying important economic, political and technological factors, among others, the absence of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) continuation of the current and projected future business environment, including interest rates and capital and consumer spending; (2) competitive factors and competitor responses to Gorman-Rupp initiatives; (3) successful development and market introductions of anticipated new products; (4) stability of government laws and 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.