UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31,September 30, 2016
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number1-6747
The Gorman-Rupp Company
(Exact name of registrant as specified in its charter)
Ohio | 34-0253990 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
600 South Airport Road, Mansfield, Ohio | 44903 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code(419) 755-1011
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 26,083,62326,091,123 shares of common stock, without par value, outstanding at April 29,October 28, 2016.
Page 1 of 1922 pages
The Gorman-Rupp Company and Subsidiaries
Three and nine months ended March 31,September 30, 2016 and 2015
Item 1. | Financial Statements (Unaudited) | |||||
Condensed Consolidated Statements of Income | 3 | |||||
Condensed Consolidated Statements of Comprehensive Income | 4 | |||||
5 | ||||||
Condensed Consolidated Statements of Cash Flows - | 6 | |||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 7 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |||||
Item 4. | Controls and Procedures | |||||
Item 1. | Legal Proceedings | |||||
Item 1A. | Risk Factors | |||||
Item 6. | Exhibits | |||||
EX-31.1 | Section 302 Principal Executive Officer (PEO) Certification | |||||
EX-31.2 | Section 302 Principal Financial Officer (PFO) Certification | |||||
EX-32 | Section 1350 Certifications | |||||
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PART I. FINANCIAL INFORMATION
ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)
THE GORMAN-RUPP COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Net sales | $ | 100,257 | $ | 99,233 | $ | 91,346 | $ | 104,229 | $ | 287,868 | $ | 307,354 | ||||||||||||
Cost of products sold | 77,360 | 75,318 | 68,676 | 80,917 | 219,061 | 235,986 | ||||||||||||||||||
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Gross profit | 22,897 | 23,915 | 22,670 | 23,312 | 68,807 | 71,368 | ||||||||||||||||||
Selling, general and administrative expenses | 13,669 | 13,312 | 12,819 | 14.363 | 40,190 | 41,933 | ||||||||||||||||||
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Operating income | 9,228 | 10,603 | 9,851 | 8,949 | 28,617 | 29,435 | ||||||||||||||||||
Other income | 94 | 331 | 551 | 99 | 704 | 515 | ||||||||||||||||||
Other expense | (63 | ) | (21 | ) | — | — | (28 | ) | (124 | ) | ||||||||||||||
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Income before income taxes | 9,259 | 10,913 | 10,402 | 9,048 | 29,293 | 29,826 | ||||||||||||||||||
Income taxes | 2,977 | 3,638 | 3,475 | 3,155 | 9,464 | 10,029 | ||||||||||||||||||
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Net income | $ | 6,282 | $ | 7,275 | $ | 6,927 | $ | 5,893 | $ | 19,829 | $ | 19,797 | ||||||||||||
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Earnings per share | $ | 0.24 | $ | 0.28 | $ | 0.27 | $ | 0.22 | $ | 0.76 | $ | 0.75 | ||||||||||||
Cash dividends per share | $ | 0.105 | $ | 0.10 | $ | 0.105 | $ | 0.10 | $ | 0.315 | $ | 0.30 | ||||||||||||
Average number of shares outstanding | 26,083,623 | 26,260,543 | 26,091,123 | 26,165,810 | 26,086,141 | 26,228,618 |
See notes to condensed consolidated financial statements.statements (unaudited).
THE GORMAN-RUPP COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
Three Months Ended March 31, | September 30, | September 30, | ||||||||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Net income | $ | 6,282 | $ | 7,275 | $ | 6,927 | $ | 5,893 | $ | 19,829 | $ | 19,797 | ||||||||||||
Cumulative translation adjustments | 1,500 | (2,836 | ) | 241 | (1,342 | ) | 1,487 | (3,557 | ) | |||||||||||||||
Pension and postretirement medical liability adjustments, net of tax | 250 | 226 | 228 | 1,448 | 710 | 2,836 | ||||||||||||||||||
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Other comprehensive income (loss) | 1,750 | (2,610 | ) | 469 | 106 | 2,197 | (721 | ) | ||||||||||||||||
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Comprehensive income | $ | 8,032 | $ | 4,665 | $ | 7,396 | $ | 5,999 | $ | 22,026 | $ | 19,076 | ||||||||||||
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See notes to condensed consolidated financial statements.statements (unaudited).
THE GORMAN-RUPP COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands) | March 31, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | ||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 40,191 | $ | 23,724 | $ | 63,681 | $ | 23,724 | ||||||||
Accounts receivable – net | 78,059 | 76,758 | 73,889 | 76,758 | ||||||||||||
Inventories – net | 77,293 | 82,818 | 74,524 | 82,818 | ||||||||||||
Other current assets | 3,354 | 6,091 | 6,146 | 6,091 | ||||||||||||
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Total current assets | 198,897 | 189,391 | 218,240 | 189,391 | ||||||||||||
Property, plant and equipment | 272,231 | 271,739 | 274,279 | 271,739 | ||||||||||||
Less accumulated depreciation | (144,662 | ) | (141,852 | ) | (149,556 | ) | (141,852 | ) | ||||||||
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Property, plant and equipment – net | 127,569 | 129,887 | 124,723 | 129,887 | ||||||||||||
Other assets | 3,981 | 3,860 | 4,159 | 3,860 | ||||||||||||
Goodwill and other intangible assets – net | 40,876 | 41,063 | 40,227 | 41,063 | ||||||||||||
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Total assets | $ | 371,323 | $ | 364,201 | $ | 387,349 | $ | 364,201 | ||||||||
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Liabilities and shareholders’ equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 17,476 | $ | 14,529 | $ | 14,996 | $ | 14,529 | ||||||||
Payroll and employee related liabilities | 9,426 | 10,871 | 13,636 | 10,871 | ||||||||||||
Commissions payable | 9,373 | 7,950 | 11,209 | 7,950 | ||||||||||||
Deferred revenue | 1,638 | 1,741 | 2,233 | 1,741 | ||||||||||||
Accrued expenses | 8,466 | 8,369 | 13,356 | 8,369 | ||||||||||||
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Total current liabilities | 46,379 | 43,460 | 55,430 | 43,460 | ||||||||||||
Pension benefits | 7,697 | 9,309 | 2,472 | 9,309 | ||||||||||||
Postretirement benefits | 20,970 | 20,784 | 21,307 | 20,784 | ||||||||||||
Deferred and other income taxes | 3,962 | 3,627 | 7,105 | 3,627 | ||||||||||||
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Total liabilities | 79,008 | 77,180 | 86,314 | 77,180 | ||||||||||||
Equity: | ||||||||||||||||
Outstanding common shares: 26,083,623 at March 31, 2016 and December 31, 2015 (net of treasury shares of 965,173, respectively), at stated capital amounts | 5,095 | 5,095 | ||||||||||||||
Outstanding common shares: 26,091,123 at September 30, 2016 and 26,083,623 at December 31, 2015 (net of treasury shares of 957,673 and 965,173, respectively), at stated capital amounts | 5,096 | 5,095 | ||||||||||||||
Retained earnings | 307,885 | 304,341 | 316,157 | 304,341 | ||||||||||||
Accumulated other comprehensive loss | (20,665 | ) | (22,415 | ) | (20,218 | ) | (22,415 | ) | ||||||||
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Total equity | 292,315 | 287,021 | 301,035 | 287,021 | ||||||||||||
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Total liabilities and equity | $ | 371,323 | $ | 364,201 | $ | 387,349 | $ | 364,201 | ||||||||
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See notes to condensed consolidated financial statements.statements (unaudited).
THE GORMAN-RUPP COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Month Ended March 31, | Nine Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 6,282 | $ | 7,275 | $ | 19,829 | $ | 19,797 | ||||||||
Adjustments to reconcile net income attributable to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 3,872 | 3,752 | 11,604 | 11,356 | ||||||||||||
Pension expense | 913 | 913 | 2,737 | 6,157 | ||||||||||||
Contributions to pension plan | (2,000 | ) | — | (8,000 | ) | — | ||||||||||
Gain on sale of property, plant and equipment | (974 | ) | (8 | ) | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable – net | (1,301 | ) | (860 | ) | 2,869 | (2,536 | ) | |||||||||
Inventories – net | 5,525 | (2,442 | ) | 8,294 | 12,604 | |||||||||||
Accounts payable | 2,947 | 2,453 | 467 | (2,195 | ) | |||||||||||
Commissions payable | 1,424 | 1,024 | 3,260 | 260 | ||||||||||||
Deferred revenue | (104 | ) | (777 | ) | 492 | (1,974 | ) | |||||||||
Accrued expenses | (1,279 | ) | (322 | ) | ||||||||||||
Benefit obligations and other | 3,831 | (2,053 | ) | |||||||||||||
Prepaid income taxes | (568 | ) | 1,952 | |||||||||||||
Payroll and benefit obligations | 2,423 | 1,464 | ||||||||||||||
Accrued expenses and other | 9,776 | (1,975 | ) | |||||||||||||
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Net cash provided by operating activities | 20,110 | 8,963 | 52,209 | 44,902 | ||||||||||||
Cash flows used for investing activities: | ||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Capital additions – net | (1,212 | ) | (1,397 | ) | (5,613 | ) | (6,897 | ) | ||||||||
Proceeds from sale of property, plant and equipment | 1,284 | 250 | ||||||||||||||
Acquisition, net of cash acquired | — | (3,386 | ) | |||||||||||||
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Net cash used for investing activities | (4,329 | ) | (10,033 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Cash dividends | (2,739 | ) | (2,626 | ) | (8,217 | ) | (7,860 | ) | ||||||||
Treasury stock purchase | — | (4,579 | ) | |||||||||||||
Payments to bank for borrowings | — | (3,000 | ) | — | (12,044 | ) | ||||||||||
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Net cash used for financing activities | (2,739 | ) | (5,626 | ) | (8,217 | ) | (24,483 | ) | ||||||||
Effect of exchange rate changes on cash | 308 | 870 | 294 | (1,055 | ) | |||||||||||
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Net increase in cash and cash equivalents | 16,467 | 2,810 | 39,957 | 9,331 | ||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Beginning of period | 23,724 | 24,491 | 23,724 | 24,491 | ||||||||||||
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End of period | $ | 40,191 | $ | 27,301 | $ | 63,681 | $ | 33,822 | ||||||||
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See notes to condensed consolidated financial statements.statements (unaudited).
6
PART I
ITEM 1. | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
NOTE A - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions toForm 10-Q and do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The consolidated financial statements include the accounts of The Gorman-Rupp Company (the “Company” or “Gorman-Rupp”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain amounts for 2015 have been reclassified to conform to the 2016 presentation. Operating results for the three and nine months ended March 31,September 30, 2016 are not necessarily indicative of results that may be expected for the year ending December 31, 2016. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, from which related information herein has been derived.
NOTE B - RECENTLY ISSUED ACCOUNTING STANDARDS
The Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.
In NovemberFebruary 2016, the FASB issued ASU 2016-02,“Leases (Topic 842),” which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remain similar to existing generally accepted accounting principles. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company currently does not expect the adoption of ASU 2016-02 to have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-17,2015-11, “Income TaxesSimplifying the Measurement of Inventory (Topic 740): Balance Sheet Classification330 ),”which revises the measurement of Deferred Taxes”inventory at the lower of cost or market. Currently, market could be replacement cost, net realizable value, or net realizable value less an approximate normal profit margin. In accordance with ASU 2015-11, an entity will measure inventory at the lower of cost and net realizable value which amended accounting guidance relatedis defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The amendment does not apply to the presentation of deferred tax liabilities and assets.inventory that is measured using last-in, first out (LIFO). The amended guidance requires that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet. This guidance is effective for reportingfiscal years, and interim periods within those years, beginning after December 15, 2016; however, early adoption is permitted. The Company adoptedcurrently does not expect the adoption of ASU 2015-17 during the quarter ended December 31, 2015. No prior periods were retrospectively adjusted.2015-11 to have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016; however, in July 2015, the FASB approved a one yearone-year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. The Company is currently does not expectevaluating the impact the adoption of ASU 2014-09 towill have a material impact on its consolidated financial statements.statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
NOTE C - INVENTORIES
Inventories are stated at the lower of cost or market. The costs for approximately 72%71% of inventories at March 31,September 30, 2016 and 73% of inventories at December 31, 2015 are determined using the last-in, first-out (LIFO) method, with the remainder determined using the first-in, first-out (FIFO) method applied on a consistent basis. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimate of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.
The major components of inventories are as follows (net of LIFO reserves of $59.8 million and $59.1 million at March 31, 2016 and December 31, 2015, respectively):
(Dollars in thousands) | March 31, 2016 | December 31, 2015 | ||||||
Raw materials and in-process | $ | 22,122 | $ | 25,652 | ||||
Finished parts | 45,472 | 46,270 | ||||||
Finished products | 9,699 | 10,896 | ||||||
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Total inventories | $ | 77,293 | $ | 82,818 | ||||
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7
PART I –- CONTINUED
ITEM 1. | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – CONTINUED |
NOTE C - INVENTORIES – CONTINUED
The major components of inventories are as follows (net of LIFO reserves of $59.3 million and $59.1 million at September 30, 2016 and December 31, 2015, respectively):
(Dollars in thousands) | September 30, 2016 | December 31, 2015 | ||||||
Raw materials and in-process | $ | 24,171 | $ | 25,652 | ||||
Finished parts | 41,751 | 46,270 | ||||||
Finished products | 8,602 | 10,896 | ||||||
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Total inventories | $ | 74,524 | $ | 82,818 | ||||
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NOTE D - PRODUCT WARRANTIES
A liability is established for estimated future warranty and service claims based on historical claims 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:
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(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Balance at beginning of year | $ | 1,380 | $ | 1,166 | $ | 1,380 | $ | 1,166 | ||||||||
Provision | 269 | 185 | 1,572 | 1,104 | ||||||||||||
Claims | (402 | ) | (280 | ) | (1,418 | ) | (1,003 | ) | ||||||||
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Balance at end of period | $ | 1,247 | $ | 1,071 | $ | 1,534 | $ | 1,267 | ||||||||
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NOTE E - PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors a defined benefit pension plan (“Plan”) covering certain domestic employees. Benefits are based on each covered employee’s years of service and compensation. The Plan is funded in conformity with the funding requirements of applicable U.S. regulations. The Plan was closed to new participants effective January 1, 2008. Employees hired after that date, in eligible locations, are eligible to participate in an enhanced 401(k) plan instead of the defined benefit pension plan. Employees hired prior to January 1, 2008 continue to accrue benefits under the Plan.
Additionally, the Company sponsors defined contribution pension plans made available to all domestic and Canadian employees. The Company funds the cost of these benefits as incurred.
8
PART I - CONTINUED
ITEM 1. | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – CONTINUED |
NOTE E - PENSION AND OTHER POSTRETIREMENT BENEFITS—CONTINUED
The following tables present the components of net periodic benefit cost:
Pension Benefits | Postretirement Benefits | Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||
Service cost | $ | 709 | $ | 784 | $ | 298 | $ | 299 | $ | 709 | $ | 765 | $ | 298 | $ | 299 | ||||||||||||||||
Interest cost | 661 | 659 | 210 | 198 | 659 | 664 | 210 | 198 | ||||||||||||||||||||||||
Expected return on plan assets | (982 | ) | (1,067 | ) | — | — | (982 | ) | (1,009 | ) | — | — | ||||||||||||||||||||
Recognized actuarial loss (gain) | 525 | 537 | (174 | ) | (163 | ) | 525 | 571 | (174 | ) | (163 | ) | ||||||||||||||||||||
Settlement loss | — | 1,890 | — | — | ||||||||||||||||||||||||||||
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Net periodic benefit cost | $ | 913 | $ | 913 | $ | 334 | $ | 334 | $ | 911 | $ | 2,881 | $ | 334 | $ | 334 | ||||||||||||||||
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Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||||||||||
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(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||||||||||||
Service cost | $ | 2,127 | $ | 2,332 | $ | 894 | $ | 897 | ||||||||||||||||||||||||
Interest cost | 1,981 | 1,982 | 631 | 595 | ||||||||||||||||||||||||||||
Expected return on plan assets | (2,947 | ) | (3,144 | ) | — | — | ||||||||||||||||||||||||||
Recognized actuarial loss (gain) | 1,576 | 1,645 | (523 | ) | (490 | ) | ||||||||||||||||||||||||||
Settlement loss | — | 3,342 | — | — | ||||||||||||||||||||||||||||
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Net periodic benefit cost | $ | 2,737 | $ | 6,157 | $ | 1,002 | $ | 1,002 | ||||||||||||||||||||||||
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9
PART I – CONTINUED
ITEM 1. | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – CONTINUED |
NOTE F –- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes reclassifications out of accumulated other comprehensive income (loss):
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
Pension and other postretirement benefits: | ||||||||||||||||||||||||
Recognized actuarial loss (a) | $ | 351 | $ | 355 | $ | 351 | $ | 397 | $ | 1,053 | $ | 1,136 | ||||||||||||
Settlement loss (b) | — | 1,320 | — | 2,279 | ||||||||||||||||||||
Settlement loss (c) | — | 570 | — | 1,063 | ||||||||||||||||||||
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Total before income tax | $ | 351 | $ | 2,287 | $ | 1,053 | $ | 4,478 | ||||||||||||||||
Income tax | (101 | ) | (129 | ) | (123 | ) | (839 | ) | (343 | ) | (1,642 | ) | ||||||||||||
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Net of income tax | $ | 250 | $ | 226 | $ | 228 | $ | 1,448 | $ | 710 | $ | 2,836 | ||||||||||||
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(a) | The recognized actuarial loss is included in the computation of net periodic benefit cost. See Note E for additional details. |
(b) | This portion of the settlement loss is included in cost of products sold on the condensed consolidated statements of income. |
(c) | This portion of the settlement loss in included in Selling, general & administrative expenses on the condensed consolidated statements of income. |
The following tables summarize changes in accumulated balances for each component of accumulated other comprehensive income (loss):
(Dollars in thousands) | Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||
Balance at January 1, 2016 | $ | (9,057 | ) | $ | (13,358 | ) | $ | (22,415 | ) | $ | (9,057 | ) | $ | (13,358 | ) | $ | (22,415 | ) | ||||||
Reclassification adjustments | — | 351 | 351 | — | 1,053 | 1,053 | ||||||||||||||||||
Current period charge | 1,500 | 42 | 1,542 | |||||||||||||||||||||
Current period credit | 1,487 | — | 1,487 | |||||||||||||||||||||
Income tax expense | — | (143 | ) | (143 | ) | — | (343 | ) | (343 | ) | ||||||||||||||
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Balance at March 31, 2016 | $ | (7,557 | ) | $ | (13,108 | ) | $ | (20,665 | ) | |||||||||||||||
Balance at September 30, 2016 | $ | (7,570 | ) | $ | (12,648 | ) | $ | (20,218 | ) | |||||||||||||||
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(Dollars in thousands) | Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | Currency Translation Adjustments | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||
Balance at January 1, 2015 | $ | (4,338 | ) | $ | (12,988 | ) | $ | (17,326 | ) | $ | (4,338 | ) | $ | (12,988 | ) | $ | (17,326 | ) | ||||||
Reclassification adjustments | — | 355 | 355 | — | 4,478 | 4,478 | ||||||||||||||||||
Current period charge | (2,836 | ) | — | (2,836 | ) | |||||||||||||||||||
Current period (charge) credit | (3,557 | ) | — | (3,557 | ) | |||||||||||||||||||
Income tax expense | — | (129 | ) | (129 | ) | — | (1,642 | ) | (1,642 | ) | ||||||||||||||
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Balance at March 31, 2015 | $ | (7,174 | ) | $ | (12,762 | ) | $ | (19,936 | ) | |||||||||||||||
Balance at September 30, 2015 | $ | (7,895 | ) | $ | (10,152 | ) | $ | (18,047 | ) | |||||||||||||||
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10
PART I – CONTINUED
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Executive Overview
The Gorman-Rupp Company is a leading designer, manufacturer and international marketer of pumps and pump systems for use in diverse water, wastewater, construction, dewatering, industrial, petroleum, original equipment, agriculture, fire protection, heating, ventilating and air conditioning (HVAC), military and other liquid-handling applications. The Company attributes its success to long-term product quality, applications and performance combined with timely delivery and service, and continually develops initiatives to improve performance in these key areas.
Gorman-Rupp actively pursues growth opportunities through organic growth, international business expansion and acquisitions.
We continually invest in training for our employees, in new product development and in modern manufacturing equipment, technology and facilities all designed to increase production efficiency and capacity and drive growth by delivering innovative solutions to our customers. We believe that the diversity of our markets is a major contributor to the generally stable financial growth we have produced over the past 80 plus years.
The Company places a strong emphasis on cash flow generation and having excellent liquidity and financial flexibility. This focus has afforded us the continuing ability to reinvest our cash resources and preserve a strong balance sheet to position us for future acquisition and product development opportunities. The Company had no bank debt as of March 31,September 30, 2016.
The Company is very proud to have been recognized for the fifth consecutive year as one of the 100 Most Trustworthy Companies in America by Forbes. To create this list, the year’s public filings for more than 2,500 publicly-traded non-financial American companies with market capitalizations of $250 million or more were reviewed and evaluated in depth to identify the 100 that most “consistently demonstrated transparent accounting practices and solid corporate governance.” Among the 47 small cap honorees, Gorman-Rupp was tied with three other companies for the highest annual rating, and was tied with one other company for the highest rating over the past four quarters.
Net sales during the firstthird quarter were $91.3 million compared to $104.2 million during the third quarter of 2015, were $100.3a decrease of 12.4% or $12.9 million. Excluding sales from the New Orleans Permanent Canal Closures & Pumps (“PCCP”) project of $1.6 million in the third quarter of 2016 and $9.8 million for the same period in 2015, net sales during the quarter decreased 5.0%. Domestic sales decreased 19.3% or $13.9 million while international sales increased 3.3% or $1.0 million compared to $99.2 million during the first quarter of 2015, an increase of 1.0%.same period in 2015. Gross profit was $22.9$22.7 million for the firstthird quarter of 2016, resulting in gross margin of 22.8%24.8%, compared to $23.9 million gross profit of $23.3 million and 24.1% gross margin of 22.4% for the same period in 2015. The quarter’s gross profit margin increase was due principally to favorable sales mix changes and a non-cash pension settlement charge of 120 basis points in the third quarter of 2015 which did not recur in the same period this year, partially offset by lower leverage due to sales volume decreases. Operating income was $9.2$9.9 million, resulting in operating margin of 9.2%10.8% for the firstthird quarter of 2016, compared to $10.6 million operating income of $8.9 million and 10.7% operating margin of 8.6% for the same period in 2015. The operating margin improvement was largely driven by a non-cash pension settlement charge totaling 180 basis points in third quarter of 2015 which did not recur in the same period this year and a gain on the sale of property, plant and equipment in the third quarter of 2016 of 110 basis points, offset by lower operating leverage due to sales volume decreases. Net income was $6.3$6.9 million during the firstthird quarter of 2016 compared to $7.3$5.9 million in the firstthird quarter of 2015 and earnings per share were $0.24$0.27 and $0.28$0.22 for the respective periods. Gain on the sale of property, plant and equipment increased the third quarter of 2016 earnings by $0.03 per share. Conversely, the non-cash pension settlement charge in the third quarter of 2015 reduced earnings by $0.05 per share.
Net sales for the nine months ended September 30, 2016 were $287.9 million compared to $307.4 million during the same period in 2015, a decrease of 6.3% or $19.5 million. Excluding sales from the PCCP project of $9.5 million in the first nine months of 2016 and $30.3 million in the first nine months of 2015, net sales for the first nine months increased 0.5%. Domestic sales decreased 8.1% or $16.7 million and international sales decreased 2.8% or $2.8 million. Of the total decrease in net sales in the first nine months of 2016, approximately $0.9 million was due to unfavorable foreign currency translation. Gross profit was $68.8 million for the first nine months of 2016, resulting in gross margin of 23.9%, compared to gross profit of $71.4 million and gross margin of 23.2% for the same period in 2015. The quarter’s gross profit margin declineincrease was due principally to major market sales mix changes resulting from consolidated contributionsa non-cash pension settlement charge of increased sales80 basis points in the fire protectionfirst nine months of 2015 which did not recur in the same period this year. Operating income was $28.6 million, resulting in operating margin of 9.9% for the first nine months of 2016, compared to operating income of $29.4 million and agricultural markets.operating margin of 9.6% for the same period in 2015. The operating margin declineimprovement also included higher professional feeswas largely driven by a non-cash pension settlement charge totaling 110 basis points in the first nine months of 2015 which did not recur in the same period this year and a gain on the sale of property, plant and equipment of 30 basis points in the first nine months of 2016, offset by lower operating leverage due to sales volume decreases. Net income was $19.8 million during the first quarternine months of 2016.both 2016 and 2015 and earnings per share were $0.76 and $0.75 for the respective periods. Gain on the sale of property, plant and equipment increased the first nine months of 2016 earnings by $0.03 per share. Conversely, the non-cash pension settlement charge reduced the first nine months of 2015 earnings by $0.09 per share.
11
PART I – CONTINUED
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED |
The Company’s backlog of orders was $111.0$102.8 million at March 31,September 30, 2016 compared to $158.9$138.8 million a year agoat September 30, 2015 and $117.1 million at December 31, 2015. The decreaseExcluding the PCCP project in 2015 and 2016, the backlog from a year ago is due primarilyat September 30, 2016 was down 16.0% as compared to approximately $34.2 million of shipments relatedSeptember 30, 2015. In addition to the Permanent Canal Closures & Pumps (“PCCP”) project in the last twelve months along withimpact of PCCP, backlog has been impacted by lower orders in the constructionpetroleum and industrialfire protection markets. Encouragingly, we did experience an increase of $16.3 million inthe municipal wastewater sector appears to be gaining momentum as incoming orders in the first quarter of 2016have increased as compared to the fourth quarterfirst nine months of 2015 across most of the major markets the Company serves.2015. Approximately $5.2$1.2 million of orders related to the PCCP project remain in the March 31,September 30, 2016 backlog total and are expected to ship by the end of the thirdfourth quarter of 2016. When completed, this flood control project will be one of the largest such projects in the world.
On April 28,October 27, 2016, the Board of Directors of the Company declared a quarterly cash dividend of $0.105$0.115 per share on the common stock of the Company, payable June 10,December 9, 2016, to shareholders of record May 13,November 15, 2016. This markswill mark the 265th267th consecutive quarterly dividend paid by The Gorman-Rupp Company. During 2015,Company and the Company again paid increased dividends and thereby attained its forty-third44th consecutive year of increased dividends.dividends paid to its shareholders. These consecutive years place Gorman-Rupp in the top 50 of all U.S. public companies with respect to number of consecutive years of increased dividend payments. The dividend yield at March 31,September 30, 2016 was 1.6%.
The Company currently expects to continue its exceptional history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.
PART I – CONTINUED
Outlook
Domestic and foreign uncertainties, including turmoil related to the production and price of oil, extensive foreign currency translation impacts and low commodity prices, made 2015 a very challenging year. These uncertainties continuecontinued to be a negative influence on capital goods investment,make the first nine months of 2016 challenging. The fourth quarter of most years has been seasonally slower and may continue to do so through mostthe PCCP project shipments are generally complete. As periods of 2016. Althougheconomic and business volatility persist, the Company normally operates in a very lean environment, we have reduced spending where practical in the short-term to address these headwindsremains focused on operational efficiencies and will continue to manage expenses closely as we do not yet see stable sales growth occurring in the near future. Our strong balance sheet provides us with the flexibility to continue to evaluate acquisition opportunities and new product development that we expect will help add value to our cost structure and make further adjustments as required.operations over the longer-term.
Generally we believe that the Company is well positioned to grow organically at a reasonably comparable sales pace and operating margin over the long term by expanding our customer base, both domestically and globally, and through new product offerings. We expect that the increasing need for water and wastewater infrastructure rehabilitation within the United States, and similar needs internationally, including in emerging economies, along with increasing demand for pumps and pump systems for industrial and agricultural applications, will provide strongcontinuing growth opportunities for Gorman-Rupp in the future.
FirstThird Quarter 2016 Compared to FirstThird Quarter 2015
Net Sales
Three Months Ended March 31, | Three Months Ended September 30, |
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(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | 2016 | 2015 | $ Change | % Change | ||||||||||||||||||||||||
Net sales | $ | 100,257 | $ | 99,233 | $ | 1,024 | 1.0 | % | $ | 91,346 | $ | 104,229 | $ | (12,883 | ) | (12.4 | )% |
Excluding sales from the New Orleans Permanent Canal Closures & Pumps (“PCCP”) project of $1.6 million in the third quarter of 2016 and $9.8 million for the same period in 2015, net sales during the quarter decreased 5.0%. Domestic sales decreased 19.3% or $13.9 million while international sales increased 3.3% or $1.0 million compared to the same period in 2015.
Sales in the third quarter of 2016 in our larger water markets group increased 3.2% between periods.decreased 8.9% or $6.5 million compared to the third quarter of 2015. Sales in the municipal market increased $1.2decreased $5.1 million primarily driven by reduced PCCP project sales of large volume pumps fornoted above, offset in part by increased shipments attributable to other flood control projects and wastewater and salesclean water applications. Sales in the fire protectionagriculture market increased $1.3 million due to domestic sales. These increases were offset by lower construction market sales of $1.5decreased $1.8 million principally due to the severe global declinewet weather conditions in many locations domestically and lower farm income. However, sales in the drilling of oil and gas.
The first quarter activity in our non-water markets were comparable between periods, increasing 0.8%. The activity includedconstruction market increased sales of $1.7$2.0 million in the petroleum market due primarily to timingsales to rental businesses as a result of long-term infrastructure projects related to mid-stream transmissionflooding in several areas domestically and a fleet purchase by a new customer. The remainder of refined petrochemical products. This increasethe overall sales decrease was offset by lower industrial market sales of $2.2 million also largely attributable to the downturn in oil and gas production and the related decline in the offloading of oil from barges due to excess inventory.
Domestic sales increased $2.6 million or 3.9% driven by the petroleum, municipal and fire protection markets while international sales decreased $1.5 million or 4.5% due to lower sales in most major markets.
Costreduced shipments of Products Sold and Gross Profitrepair parts.
Three Months Ended March 31, | ||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Cost of products sold | $ | 77,360 | $ | 75,318 | $ | 2,042 | 2.7 | % | ||||||||
% of Net sales | 77.2 | % | 75.9 | % | ||||||||||||
Gross Margin | 22.8 | % | 24.1 | % |
The decrease in gross margin was due primarily to higher cost of material driven by sales mix changes resulting from consolidated contributions of increased sales in the fire protection and agricultural markets. Gross margin benefited from lower labor costs of approximately 61 basis points.12
PART I – CONTINUED
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED |
Sales decreased 20.3% or $6.4 million in non-water markets during the third quarter of 2016 compared to the third quarter of 2015. Sales in the industrial market decreased $4.2 million and sales in the petroleum market decreased $1.4 million, both principally attributable to the continued slowdown in oil and gas production.
Cost of Products Sold and Gross Profit
Three Months Ended September 30, | ||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Cost of products sold | $ | 68,676 | $ | 80,917 | $ | (12,241 | ) | (15.1)% | ||||||||
% of Net sales | 75.2 | % | 77.6 | % | ||||||||||||
Gross Margin | 24.8 | % | 22.4 | % |
The improvement in gross margin in the third quarter of 2016 compared to the third quarter of 2015 was principally due to lower cost of material of 290 basis points driven by sales mix changes and a favorable LIFO adjustment. In addition, pension expense was lower because of a non-cash pension settlement charge of 120 basis points in the third quarter of 2015 which did not recur in the third quarter of 2016. Partially offsetting these favorable variances was lower leverage because of sales volume decreases.
Selling, General and Administrative Expenses (SG&A)
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | 2016 | 2015 | $ Change | % Change | ||||||||||||||||||||||||
Selling, general and administrative expenses | $ | 13,669 | $ | 13,312 | $ | 357 | 2.7 | % | $ | 12,819 | $ | 14,363 | $ | (1,544 | ) | (10.7 | )% | |||||||||||||||
% of Net sales | 13.6 | % | 13.4 | % | 14.0 | % | 13.8 | % |
The increase in SG&A expenses as a percentage of net sales in the third quarter of 2016 compared to the third quarter of 2015 was due principally to loss of leverage due to lower sales volume, increased professional services fees of approximately 3850 basis points related largely to audit fees in connection with recently acquired businesses and profit sharing expenseincreased healthcare costs of 17approximately 40 basis points. Offsetting this increasethese increases was lower advertising expensea gain on the sale of approximately 23 basis points due to less trade shows duringproperty, plant and equipment in the firstthird quarter of 2016 and lower compensation expense of approximately 16110 basis points. There was a pension settlement charge in the third quarter of 2015 of 60 basis points due to lower headcount from retireeswhich did not yet replaced.recur in the third quarter of 2016.
Net Income
Three Months Ended March 31, | ||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Income before income taxes | $ | 9,259 | $ | 10,913 | $ | (1,654 | ) | (15.2)% | ||||||||
% of Net sales | 9.2 | % | 11.0 | % | ||||||||||||
Income taxes | $ | 2,977 | $ | 3,638 | $ | (661 | ) | (18.2)% | ||||||||
Effective tax rate | 32.2 | % | 33.3 | % | ||||||||||||
Net income | $ | 6,282 | $ | 7,275 | $ | (993 | ) | (13.7)% | ||||||||
% of Net sales | 6.3 | % | 7.3 | % | ||||||||||||
Earnings per share | $ | 0.24 | $ | 0.28 | $ | (0.04 | ) | (14.3)% |
The decreases in net income and earnings per share were due primarily to major market sales mix changes and higher SG&A expenses as discussed above. The decrease in the effective tax rate between the two periods is due primarily to a research and development tax credit being in effect in first quarter of 2016 but not in first quarter of 2015 and changes in the estimated domestic production activities deduction.
(Dollars in thousands) Income before income taxes % of Net sales Income taxes Effective tax rate Net income % of Net sales Earnings per shareLiquidity and Capital Resources Three Months Ended
September 30, 2016 2015 $ Change % Change $ 10,402 $ 9,048 $ 1,354 15.0 % 11.4 % 8.7 % $ 3,475 $ 3,155 $ 320 10.1 % 33.4 % 34.9 % $ 6,927 $ 5,893 $ 1,034 17.5 % 7.6 % 5.7 % $ 0.27 $ 0.22 $ 0.05 22.7 %
Three Month Ended March 31, | ||||||||
2016 | 2015 | |||||||
Net cash provided by operating activities | $ | 20,110 | $ | 8,963 | ||||
Net cash used for investing activities | (1,212 | ) | (1,397 | ) | ||||
Net cash used for financing activities | (2,739 | ) | (5,626 | ) |
Cash and cash equivalents and short-term investments totaled $40.5 million and there was no outstanding bank debt at March 31, 2016. In addition, the Company had $24.0 million available in bank lines of credit after deducting $7.0 million in outstanding letters of credit primarily related to customer orders. The Company was in compliance with its nominal restrictive covenants, including limits on additional borrowings and maintenance of certain operating and financial ratios, at March 31, 2016.13
Working capital increased $6.6 million from December 31, 2015 to a record $152.5 million at March 31, 2016. The increase was due principally to higher cash partially offset by lower inventories.
PART I – CONTINUED
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED |
The increase in net income in the third quarter of 2016 compared to the third quarter of 2015 was due primarily to a gain on the sale of property, plant and equipment in 2016, a favorable LIFO adjustment in 2016 and a pension settlement charge in the third quarter of 2015 which did not recur in the third quarter of 2016. These favorable variances were offset by lower sales volume. The decrease in the effective tax rate between the two periods was due primarily to a research and development tax credit being in effect in the third quarter of 2016 but not in the third quarter of 2015, changes in the estimated domestic production activities deduction and the impact of more income in jurisdictions with lower tax rates.
Nine Months 2016 Compared to Nine Months 2015
Net Sales
Nine Months Ended September 30, | ||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Net sales | $ | 287,868 | $ | 307,354 | $ | (19,486 | ) | (6.3 | )% |
Excluding sales from the PCCP project of $9.5 million in the first nine months of 2016 and $30.3 million in the first nine months of 2015, net sales for the first nine months increased 0.5%. Domestic sales decreased 8.1% or $16.7 million and international sales decreased 2.8% or $2.8 million. Of the total decrease in net sales in the first nine months of 2016, approximately $0.9 million was due to unfavorable foreign currency translation.
Sales in the first nine months of 2016 in our larger water markets decreased 6.8% or $14.9 million compared to the first nine months of 2015. Sales in the municipal market decreased $8.8 million driven by reduced PCCP project sales noted above, offset in part by increased shipments attributable to other flood control projects and clean water and wastewater applications. Sales decreased $3.1 million in the agriculture market principally due to wet weather conditions in many locations domestically and lower farm income, and sales in the fire protection market decreased $2.2 million due to market softness domestically and in countries in the Middle East.
Sales decreased 5.3% or $4.6 million in non-water markets during the first nine months of 2016 compared to the first nine months of 2015. Increased sales of $2.6 million in the OEM market related to power generation equipment and services were offset by a decrease of $7.1 million in the industrial market largely attributable to the continued slowdown in oil and gas production.
Cost of Products Sold and Gross Profit
Nine Months Ended September 30, | ||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Cost of products sold | $ | 219,061 | $ | 235,986 | $ | (16,925 | ) | (7.2 | )% | |||||||
% of Net sales | 76.1 | % | 76.8 | % | ||||||||||||
Gross Margin | 23.9 | % | 23.2 | % |
The improvement in gross margin in the first nine months of 2016 compared to the same period in 2015 was driven by a non-cash pension settlement charge in the first nine months of 2015 of 80 basis points which did not recur in the same period in 2016, and a favorable LIFO adjustment of 50 basis points in 2016. Partially offsetting these favorable variances was lower leverage because of sales volume decreases.
14
PART I – CONTINUED
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED |
Selling, General and Administrative Expenses (SG&A)
Nine Months Ended September 30, | ||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Selling, general and administrative | $ | 40,190 | $ | 41,933 | $ | (1,743 | ) | (4.2 | )% | |||||||
% of Net sales | 14.0 | % | 13.6 | % |
The increase in SG&A expenses as a percentage of net sales in the first nine months of 2016 compared to the same period in 2015 was due principally to loss of leverage due to lower sales volume and increased professional services fees of approximately 40 basis points related largely to costs incurred in connection with acquired businesses during the previous two years. Offsetting these increases was a non-cash pension settlement charge of 30 basis points from the first nine months of 2015 which did not recur in the same period in 2016.
Net Income
Nine Months Ended September 30, | ||||||||||||||||
(Dollars in thousands) | 2016 | 2015 | $ Change | % Change | ||||||||||||
Income before income taxes | $ | 29,293 | $ | 29,826 | $ | (533 | ) | (1.8 | )% | |||||||
% of Net sales | 10.2 | % | 9.7 | % | ||||||||||||
Income taxes | $ | 9,464 | $ | 10,029 | $ | (565 | ) | (5.6 | )% | |||||||
Effective tax rate | 32.3 | % | 33.6 | % | ||||||||||||
Net income | $ | 19,829 | $ | 19,797 | $ | 32 | 0.2 | % | ||||||||
% of Net sales | 6.9 | % | 6.4 | % | ||||||||||||
Earnings per share | $ | 0.76 | $ | 0.75 | $ | 0.01 | 1.3 | % |
The increases in net income and earnings per share in the first nine months of 2016 compared to the same period in 2015 were due primarily to a gain on the sale of property, plant and equipment, a favorable LIFO adjustment and lower pension expense due to a pension settlement charge in the first nine months of 2015 which did not recur in the same period in 2016. These favorable variances were offset by sales volume decreases from 2015 to 2016. The decrease in the effective tax rate between the two periods was due primarily to a research and development tax credit being in effect in the first nine months of 2016 but not in the first nine months of 2015, changes in the estimated domestic production activities deduction and the impact of more income in jurisdictions with lower tax rates.
Liquidity and Capital Resources
Nine Months Ended September 30, 2016 | ||||||||
2016 | 2015 | |||||||
Net cash provided by operating activities | $ | 52,209 | $ | 44,902 | ||||
Net cash used for investing activities | (4,329 | ) | (10,033 | ) | ||||
Net cash used for financing activities | (8,217 | ) | (24,483 | ) |
Cash and cash equivalents totaled $63.7 million and there was no outstanding bank debt at September 30, 2016. In addition, the Company had $23.9 million available in bank lines of credit after deducting $7.1 million in outstanding letters of credit primarily related to customer orders. The Company has continuously been in compliance with its nominal restrictive covenants, such as limits on additional borrowings and maintenance of certain operating and financial ratios, including at September 30, 2016.
15
PART I – CONTINUED
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED |
Working capital increased $16.9 million from December 31, 2015 to a record $162.8 million at September 30, 2016. This increase was due principally to higher cash balances partially offset by lower inventories and increased customer deposits.
The primary drivers of operating cash flows during the first threenine months of 2016 were operating income, reduced inventories lower estimated income tax payments and higher accounts payable.increased customer deposits partially offset by $8.0 million of contributions to the pension plan. During this same period in 2015, operating cash flows were primarily driven by increased accounts payablecash earnings during the period and commissions due to timing and product mix, respectively.a planned decrease in inventory levels.
During the first threenine months of 2016, investing activities of $1.2$4.3 million primarily consisted of capital expenditures for machinery and equipment, a new operations facility in Africa, and other building improvements. Net capitalimprovements totaling $5.6 million offset by proceeds from the sale of property, plant and equipment of $1.3 million. Capital expenditures for the fourth quarter of 2016 consisting principally of machinery and equipment and building improvements, are estimatedcurrently expected to be in the range of $12$1 to $14$3 million and are expected to be principally financed through internally generated funds. During the first threenine months of 2015, cash used in investing activities of $1.4$10.0 million primarily consisted primarily of net capital expenditures of $6.6 million for machinery and equipment, a new operations facility in Ireland and other building improvements.improvements, and the acquisition of the Hydro companies for $3.4 million.
Net cash used for financing activities for the first quarternine months of 2016 consisted of dividend payments of $2.7$8.2 million. DuringNet cash used in financing activities for the first quarternine months of 2015 financing activities consisted of dividend payments of $2.6$7.9 million, and re-payment of $3.0$12.0 million in short-term debt. The ratiodebt and a privately-arranged market value purchase of current assets to current liabilities was 4.3 to 1 at March 31, 2016 and 4.4 to 1 at December 31, 2015.Company shares in the amount of $4.6 million from a Rupp family estate.
On April 28,October 27, 2016, the Board of Directors of the Company declared a quarterly cash dividend of $0.105$0.115 per share on the common stock of the Company, payable June 10,December 9, 2016, to shareholders of record May 13,November 15, 2016. The cash dividend represents a 9.5% increase over the dividend paid in the previous quarter. This markswill mark the 265th267th consecutive quarterly dividend paid by The Gorman-Rupp Company.Company and the 44th consecutive year of increased dividends paid to its shareholders.
The Company currently expects to continue its distinguished history of paying regular quarterly dividends and increased annual dividends. However, any future dividends will be reviewed individually and declared by our Board of Directors at its discretion, dependent on our assessment of the Company’s financial condition and business outlook at the applicable time.
Critical Accounting Policies
Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended December 31, 2015 contained in our Fiscal 2015 Annual Report on Form 10-K.10-K for the year ended December 31, 2015. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
Safe Harbor Statement
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, The Gorman-Rupp Company provides the following cautionary statement: This Form 10-Q contains various forward-looking statements based on assumptions concerning The Gorman-Rupp Company’s operations, future results and prospects. These forward-looking statements are based on current expectations about important economic, political, and technological factors, among others, and are subject to risks and uncertainties, which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.
Such factors include, but are not limited to: (1) continuation of the current and projected future business environment, including interest rates, changes in foreign exchange rates, commodity pricing and capital and consumer spending and volatility in domestic oil production activity; (2) competitive factors and competitor responses to initiatives of The Gorman-Rupp Company; (3) successful development and market introductions of anticipated new products; (4) stability of government laws and regulations,
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PART I – CONTINUED
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED |
including taxes; (5) stable governments and business conditions in emerging economies; (6) successful penetration of emerging economies; (7) unforeseen delays or disruptions in the PCCP project, including any further revisions to the timing of shipments for the project; (8) continuation of the favorable environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of potential candidates and our ability to successfully integrate and realize the anticipated benefits of completed acquisitions; (8) if acquired businesses do not meet performance expectations, assets acquired could be subject to impairment; and (9) risks described from time to time in our reports filed with the Securities and Exchange Commission. Except to the extent required by law, we do not undertake and specifically decline any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.
PART I – CONTINUED
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company’s foreign operations do not involve material risks due to their relative size, both individually and collectively. Approximately 90% of the Company’s sales are domiciled within or originated from the United States. The Company does not believe it is not exposed to material market risks as a result of its diversified export sales. Export sales generally are denominated in U.S. Dollars and made on open account or under letters of credit.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. The Company’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s Management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
An evaluation was carried out under the supervision and with the participation of the Company’s Management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31,September 30, 2016.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS |
There are no material changes from the legal proceedings previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
ITEM 1A. | RISK FACTORS |
ThereExcept as noted below, there are no material changes from the risk factors previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Impairment - If acquired businesses do not meet performance expectations, assets acquired could be subject to impairment.
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PART II – CONTINUED
ITEM 1A. | RISK FACTORS – CONTINUED |
The Company’s total assets reflect goodwill from acquisitions, representing the excess cost over the fair value of the identifiable net assets acquired, including other indefinite-lived intangible assets and long-lived assets. Goodwill and other indefinite-lived intangible assets are not amortized but are reviewed annually for impairment as of October 1 or whenever events or changes in circumstances indicate there may be a possible permanent loss of value using either a quantitative or qualitative analysis. 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. If future operating performance at one or more of the Company’s reporting units were to fall significantly below forecast levels or if market conditions for one or more of its acquired businesses were to decline, the Company could be required to incur a non-cash charge to operating income for impairment. Any impairment in the value of these assets could have an adverse non-cash impact on the Company’s reported results of operations.
ITEM 6. |
Exhibit 31.1 | Certification of Jeffrey S. Gorman, Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 31.2 | Certification of Wayne L. Knabel, Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32 | Certification pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | |
Exhibit 101 | Financial statements from the Quarterly Report on Form 10-Q of The Gorman-Rupp Company for the quarter ended |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Gorman-Rupp Company | ||||
(Registrant) | ||||
Date: | ||||
By: | /s/ Wayne L. Knabel | |||
Wayne L. Knabel | ||||
Chief Financial Officer |
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